When it comes to real estate transactions, one of the critical concepts that buyers and sellers encounter is the mortgage. However, not all mortgages are the same, and the way in which the buyer handles the existing mortgage can vary significantly. Two terms that often come up in this context are “assume” and “subject to.” These terms have important implications for both buyers and sellers, affecting how the mortgage is managed, transferred, and paid off. In this article, I will explore the differences between “assume” and “subject to” mortgages, their respective benefits and risks, and how these options play out in the real estate market. I’ll also provide detailed examples and calculations to help illustrate key points.
Table of Contents
What Does It Mean to “Assume” a Mortgage?
When a buyer assumes a mortgage, they take responsibility for the existing loan on the property, with the lender’s approval. This means the buyer steps into the seller’s shoes and begins making payments on the mortgage, which typically remains under the same terms, such as interest rate, loan balance, and repayment schedule.
The process of assuming a mortgage can be particularly appealing if the existing loan has favorable terms, such as a low interest rate. In this scenario, the buyer benefits from the terms of the original loan without needing to secure a new mortgage.
Key Features of Mortgage Assumption
- Lender Approval Required: The lender must approve the assumption. The buyer typically needs to qualify based on their creditworthiness, income, and ability to make payments.
- Retained Terms: The buyer retains the original terms of the mortgage, such as the interest rate and loan amount.
- Full Responsibility: The buyer is fully responsible for paying off the loan. If the buyer defaults, the lender can pursue foreclosure on the property.
Example of a Mortgage Assumption
Let’s say a seller has a mortgage balance of $200,000 at an interest rate of 3.5%, with 20 years left on the loan. If the buyer assumes the mortgage, they would take on the remaining balance and continue making payments under the same interest rate and terms.
For simplicity, let’s calculate the monthly mortgage payment using the mortgage formula, assuming the loan balance is $200,000, the interest rate is 3.5%, and the loan term is 20 years.
The formula to calculate the monthly mortgage payment (M) is:M=P×r(1+r)n(1+r)n−1M = P \times \frac{r(1+r)^n}{(1+r)^n-1}M=P×(1+r)n−1r(1+r)n
Where:
- PPP = loan principal ($200,000)
- rrr = monthly interest rate (annual rate divided by 12) (3.5%/12 = 0.0029167)
- nnn = total number of payments (20 years * 12 months = 240 payments)
Plugging in the numbers:M=200,000×0.0029167(1+0.0029167)240(1+0.0029167)240−1M = 200,000 \times \frac{0.0029167(1+0.0029167)^{240}}{(1+0.0029167)^{240}-1}M=200,000×(1+0.0029167)240−10.0029167(1+0.0029167)240
The monthly payment would be approximately $1,161.36.
If the buyer assumes the mortgage, their monthly payment will be this same amount for the remaining 20-year period.
What Does It Mean to Buy “Subject to” a Mortgage?
When a buyer purchases a property “subject to” an existing mortgage, they acquire the property without assuming the mortgage. In this case, the seller’s mortgage remains in place, but the buyer takes control of the property and begins making payments on the mortgage. The buyer does not officially assume the debt; rather, they agree to pay the seller’s mortgage, but the mortgage still remains in the seller’s name.
In many cases, “subject to” deals arise when the buyer and seller agree to a transaction that allows the buyer to take over payments, without the need for lender approval. This arrangement can be beneficial in situations where the seller is facing financial difficulties, or the buyer may not qualify for a traditional mortgage.
Key Features of a “Subject to” Mortgage
- No Lender Approval: Unlike a mortgage assumption, there is no need for the lender’s approval for a “subject to” transaction. The buyer does not formally assume the loan but takes over payments.
- Seller’s Name on the Loan: The mortgage remains in the seller’s name, which means the seller remains ultimately responsible for the loan, even though the buyer is making the payments.
- Risk to the Seller: If the buyer defaults, the lender can still pursue the seller for repayment, even though the buyer is the one making the payments.
- Potential for Faster Closing: Since no lender approval is necessary, these deals can often close faster than traditional sales.
Example of a “Subject to” Purchase
Let’s say the seller has a mortgage balance of $180,000 at an interest rate of 4.5%, and the buyer purchases the property “subject to” the mortgage. In this case, the buyer agrees to make payments on the loan but does not assume it officially. The seller remains the borrower on record, and the mortgage stays in the seller’s name.
If the buyer agrees to take over the payments of $1,400 per month, they will continue to pay that amount, but the lender can still look to the seller if there’s a default. In this situation, the buyer doesn’t have to go through the approval process with the lender, making it an attractive option if they do not qualify for traditional financing.
Assumption vs. Subject to: A Comparison
Here is a comparison table that summarizes the key differences between “assume” and “subject to” mortgages:
| Feature | Assume Mortgage | Subject to Mortgage |
|---|---|---|
| Lender Approval | Required | Not Required |
| Mortgage Terms | Retained (same terms as original loan) | Seller’s original terms, but buyer pays |
| Responsibility | Buyer is fully responsible for the loan | Buyer makes payments, but seller remains liable |
| Risk | Buyer assumes full risk of the loan | Seller remains at risk of default |
| Closing Speed | Can take longer due to lender approval | Can be faster due to no lender approval |
| Use in Real Estate | Common in traditional sales | Often used in creative financing deals |
Pros and Cons of Each Option
Pros of Assuming a Mortgage
- Retaining Favorable Terms: If the current mortgage has a low interest rate, assuming it can save money over the long term.
- Faster Financing Process: Since you’re assuming an existing mortgage, you might avoid the need for traditional loan approval.
- No Need for a New Mortgage: Assumption allows the buyer to avoid the hassle of obtaining a new mortgage, particularly if they face challenges with credit scores or financial history.
Cons of Assuming a Mortgage
- Lender Approval Required: The buyer must qualify with the lender, and the lender may not approve the assumption.
- Potential for Fees: The lender may charge fees for processing the assumption, which can increase costs.
- Not Always Available: Not all loans are assumable. For example, most modern loans (such as FHA or conventional loans) are not easily assumable.
Pros of Buying “Subject to” a Mortgage
- No Lender Approval: The buyer doesn’t need lender approval, which can be helpful in situations where they may not qualify for traditional financing.
- Faster Closing: Without the need for lender approval, these transactions can close much more quickly.
- Opportunity for Creative Financing: For buyers looking to avoid traditional loan routes, “subject to” deals can provide flexibility.
Cons of Buying “Subject to” a Mortgage
- Seller Remains Liable: The seller remains responsible for the mortgage, even though the buyer is making payments.
- Potential for Legal Complications: If the buyer defaults, the seller could be held liable for the loan, leading to legal issues.
- Limited Availability: Not all sellers are willing to agree to a “subject to” deal, especially if they are concerned about the ongoing liability.
Conclusion
Understanding the difference between “assume” and “subject to” mortgages is crucial for both buyers and sellers in the real estate market. While both options allow a buyer to take over a property without a traditional mortgage, the terms and risks vary significantly. Mortgage assumptions offer the benefit of retaining favorable loan terms, but require lender approval. On the other hand, “subject to” purchases allow buyers to take control of the property without lender approval but leave the seller ultimately liable for the mortgage.
As a buyer or seller, it is important to fully understand these options and consult with real estate professionals and legal advisors to ensure the transaction is handled properly. Whether you’re looking to assume an existing mortgage or purchase “subject to” a loan, both strategies can offer unique advantages in the right circumstances.
