How to Insure a Property Bought Subject-To the Existing Mortgage​

How to Insure a Property

Bought Subject-To the Existing Mortgage

Buying properties subject to the existing mortgage is a creative financing technique many real estate investors have employed over the years, but have they done it legally? Perhaps unknowingly they or even you have committed insurance fraud. I don’t say this to condemn anyone or scare them but to try to help and inform. I have been an Insurance Adjuster for 15+ years now and when I read the forums I see one thing consistently when it comes to insurance, confusion.

The problem you can run into with buying a property subject to (with regards to insurance) is whether or not you have gotten permission to assume the mortgage from the mortgage company. Now some investors out there may be saying that if you attempt to do this it can alert the mortgage company to what you are trying to do.  If the mortgage company does not agree, then they will be on the lookout for warning signs that the property has been transferred without their permission. To that I say, YOUR RIGHT! (We will get into that more later.)

Lets jump into a couple scenarios of subject to sales/ purchase:

Scenario 1:

You find a homeowner that is a motivated seller but they have an existing mortgage on their property. They are willing to walk away from the property if you just take care of their mortgage. For whatever reason you can’t get financing to pay off the mortgage but you are able to agree to take over the homeowners’ mortgage and assist them in moving costs.

You don’t want the mortgage company to stop your chance of getting this great property so you don’t bother to ask them if you can take over the mortgage. You tell the home owner you will just pay them the mortgage payment and they will keep paying the mortgage for you so that the mortgage company is none the wiser; they agree. You transfer the deed and all is well with the world, right! WRONG!

(First a small tangent off of insurance) I DO NOT recommend doing a sale this way.  That is not to say subject-to is bad but the way it is listed above, It is NOT a good idea. However, if you are insistent on doing it anyway, protect yourself. Don’t make payments directly to the homeowner. Use a third party that you both agree on. You make your payment to the third party and they make the payment to the mortgage company. That way you know the money you are paying is actually being paid to the mortgage company and not being pocketed by the prior homeowner.

Ok, back to insurance. So now the property has been transferred into your name but the mortgage is still in the name of the prior homeowner. Now you need to get insurance on the property right. Most people are probably saying they will just have the prior homeowner keep their insurance and have them added on as an “additional payee.” I see this in the forums. Problem with this is IT’S ILLEGAL.

In insurance there is something called “insurable interest”. Basically it means I cannot have insurance on any property that I do not have any ownership in. So when the prior homeowner transferred the property to you, he also transferred his insurable interest to you. That means he no longer has any legal right to have insurance on the property. Sure if the insurance company never finds out then of course there is no problem. Just like if the police never figure out you robbed the bank there is no problem. However, if they do find out there is a problem, and it can be a big one! (Or multiple)

Problems:

1. IT IS FRAUD!

2. All the insurance premiums you have been paying are gone. (Wasted money)

3. All insurance claims you are currently trying to claim are denied.

4. All past insurance claims that have been previously paid; you now will have to pay              back! This could be thousands of dollars. (Since the date the fraud began.)

5. They can press charges and both the prior home owner & you can go to jail!

Now to explain the “additional Payee” vs “insured”

As I said above many people think they can just be added to a policy as an additional payee. The only way to be a payee on an insurance claim/ policy is to be an insured on an insurance policy. I issue payments on insurance claims every single day (Monday through Friday anyway) and please believe me on this, I have seen so much misinformation in the forums, even by people listed as insurance agents. Insurance agents sell insurance, they do not handle claims or claim payments.

The only way to be a payee on a FIRST PARTY claim in an insurance policy is to be an insured.

Notice I said First Party, we will come back to that. So then what is a “payee” or “additional payee” if you have to be an insured to be paid?

Insurance claim payments:

Payee = Primary Insured, This is the person who took out the policy with the insurance company.

Additional Payee = This is any and all other individuals with an insurable interest in the property. This can include your spouse if you bought the property with them, a business partner on an investment AND the mortgage company.

So if you are not an insured with a legal insurable interest on the property you cannot be on the insurance policy.

(Another short tangent, Third Party Claims) Above I mentioned First party claim payments and that the only way to get paid was as an insured. Well third party claims are when someone else puts a claim against you. That’s why we all have liability coverage. When they get paid they are called a “Claimant.” (And in cause you are wondering there is no such thing as a 2nd party claim.)

Now back to the subject-to. If you transfer the property into your name and you take out insurance on the property (since the prior homeowner no longer has an insurable interest) you will have to also list the mortgage company as an additional insured on the policy. IF YOU DO NOT IT IS FRAUD. Then the mortgage company is notified of the transfer of the property and likely triggers the due on sale clause.

Scenario 2:

You find a homeowner that is a motivated seller but they have an existing mortgage on their property. They are willing to walk away from the property if you just take care of their mortgage. For whatever reason you can’t get financing to pay off the mortgage but you are able to agree to take over the homeowners’ mortgage and assist them in moving costs.

This time as a contingency of the deal you require that the mortgage company agree to allow you to assume the mortgage. They do, you transfer the dead into your name from the prior homeowner and are now free to get insurance on the property in your name and with the mortgage company.

Sounds nice right… so what is the problem with this scenario?

1. If the investor was not able to get financing to pay off the mortgage why would this              bank allow them to assume the mortgage?

2. Many Bank notes are not assumable period. (You can always ask anyway but if it is in          the note then…)

Now the scenario above is not meant to say that any and or all investors reading this could not get financing or get the bank to agree. I am sure that many could and have. It is/ was just an example. I am by no means an expert on Subject-to, and there is much more that goes into the selling/ buying of a subject to deal. There are many other resources that dig deeper into that and that is not my intent. My purpose here was to point out the problems with insuring a subject to deal.

The only legal way to insure a subject to deal is to get the mortgage company to approve the mortgage transfer for the property from the prior home owner into your name.  Then you can pay the mortgage company directly and insure the property yourself with the mortgage company on the policy, thereby removing the prior homeowner entirely.

I hope this has helped someone.

Best of luck to All!