Buying Subject to Assuming Without Consent

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Again notice that the wording of Paragraph No. 18 does not stop the owners from selling a mortgaged property to anyone they choose to. Nor in such sales does it require the sellers or the buyers to pay off the loan. The "due on sale" clause merely gives the lender the right (or option) to call the loan due.

Sometimes when buyers and sellers believe that a lender won't allow an assumption, they complete the sale and never inform the lender that the owner has sold the property. The buyer then makes payments to the lender on the same terms and interest rate that applied to the seller. Contrary to what some people say, this "subject to" technique is neither illegal, immoral, or fattening. Nor does it violate the mortgage contract. Nevertheless, the "subject to" technique may rattle the nerves of buyers and sellers.

Risky Business for Buyers. If the lender learns of the sale, it might mail the seller a nasty letter and demand a very large check. With the loan called due, someone would quickly need to pay off, refinance, or negotiate a settlement with the lender. Weak borrowers who can't come up with the cash, credit, or negotiating power to satisfy the lender face foreclosure. The buyers may lose the cash they've invested in the property. On the other hand, if you are financially strong enough to deal with this "call" potential, your risks are low. You simply refinance (obtain a new loan).

Risks to Sellers. Typically, under a lender-approved mortgage assumption, the lender qualifies the buyers of the property. When the buyers gain approval, the lender releases the sellers from liability on the mortgage note. Whatever happens to that mortgage in the future does not concern the sellers or their credit record.

Not so with "subject to" transfers. In those cases, the seller's credit and finances remain at risk for as long as the mortgage remains outstanding. If the buyer pays the mortgage late, the lender forwards scurrilous remarks about the seller to the credit bureau. If the property goes into foreclosure, the lender will chase down the seller for any money (deficiency) judgments the court awards it.

Is This Technique Worth the Risks? Yes, for creditworthy, financially strong buyers, and for sellers who adequately protect themselves against the buyers' default. I have used "subject to" financing on several occasions. In 1981, for example, market mortgage rates were at 16 percent. I bought a property "subject to" that carried a mortgage rate of 10 percent. Because this property was a "flipper," I resold after 18 months but, during that short period, the "subject to" mortgage saved me $17,000 in interest, points, and closing costs.

Amateurs Beware. Several current authors promote "subject to" purchases to those "no cash, no credit" buyers who probably should not buy until they have strengthened their fiscal fitness. Here's my advice: Amateurs beware! Although this technique can prove appealing in some situations—short-term holding periods, high interest mortgage environment, credit impairment—don't get in over your head or take on risks that you cannot deal with successfully. "Subject to" financing presents rewards and risks to sellers and buyers. Measure both.

Will Lenders Really Call the Loan? The gurus say, "Not a problem. Here's a bag of tricks. Use these tricks, and the lender won't find out about the property transfer. Surely, what the lender can't see won't hurt you. Just keep the lender in the dark."

Do these tricks work? Not likely for any extended period of time. After suffering through the high loss 1980s and early 1990s, lenders have become far more watchful. Within a year or two, at most, the lender will probably discover the transfer.

"No worries mate," the gurus say. "Even if the lender discovers the transfer, chances are it won't call the loan due. Most lenders follow a 'don't ask, don't tell' policy. They're not going to advertise their waiver. As long as your monthly checks keep flowing in on time and the property taxes and insurance get paid, your risks are small." On this point (for now at least), I agree, because interest rates on most "subject to" mortgages today do not sit much below market rates. If interest rates spike up, though, lenders may send out their enforcers. So, although you can wisely buy "subject to," prepare to refinance, sell, or renegotiate should the lender demand payment (i.e., accelerate the mortgage note).

Table 3.8 MHFA's MCC Program

$100,000 Loan




Monthly Amounts


Principal and interest



Taxes and insurance (est.)



MCC value



Net payment (PITI)



Housing cost ratio



Required monthly income to qualify



for mortgage

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