When used as an investment strategy, so-called "mortgage assignment" deals are really just "subject to" agreements dressed up in new packaging. The strict definition of a mortgage assignment is one lender transferring a mortgage to another lender. By contrast, anyone can take over a mortgage subject to the original borrower's loan terms.
Assignment vs. Subject To Agreement
When you take out a home loan, you agree to repay the lender according to the terms and conditions set forth in your mortgage. Right after the ink on your loan papers dries, you lender might turn around and sell it to another bank. This transaction, known as a mortgage assignment, happens quite frequently in the home loan industry. The new lender takes over the mortgage with all the original conditions intact. As the borrower, you can't assign your mortgage -- that right belongs solely to your lender
By contrast, anyone can buy or sell a mortgage with a "subject to" agreement. You might also hear this arrangement referred to as a "mortgage assumption." The property rights transfer to the new owner, but the mortgage remains in the seller's name.
When They're Used
In most cases, real estate investors take over a home owner's payments "subject to" the existing mortgage. These agreements also work for buyers who can't come up with a large enough down payment to qualify for conventional financing.
How They Work
When a buyer purchases a property subject to an existing mortgage, all the original terms stay in place. This means that the monthly payments, interest rates, and insurance premiums don't change. According to real estate investor Glen Andrews, there are several things that need to happen to put a subject to agreement in place:
Just like a traditional home sale, you need to put everything in writing. Your purchase agreement should reiterate the terms of the original mortgage. You also need the seller's written permission to obtain lending information from the bank.
Subject to agreements should never be a secret. Notify the lender that you intend to enter into this arrangement. Some lenders prohibit subject to agreements because they can't be sure the buyer is going to make the payments.
Many mortgages contain "due on sale" clauses that state the entire loan balance is due if the borrower enters into a subject to agreement. On the other hand, the lender might be more willing to approve a subject to agreement if the seller is in financial trouble and the house is ready to go into foreclosure.
As with all real estate transactions, there are additional forms you must file to make your agreement legal and binding. Some of the forms and documents you will encounter include:
- Assignment of Beneficial Interest: This is the official document in which the seller transfers ownership rights to the buyer.
- Letter of Disclosure: The seller acknowledges that he is aware of any due on sale clauses.
- Notice to Letter: You must notify the lender that you're taking the property subject to the mortgage.
- Limited Power of Attorney: The seller gives the buyer the authority to sell, transfer, or otherwise encumber the property if necessary.
- Change of Address Letter: This notifies the lender that mortgage statements must be mailed to a new address.
- Deed: The seller transfers his interest through a deed. There are several different types of deeds, however, warranty deeds are most common in real estate transactions. The deed must be recorded with the county recorder's office where the home is located.
Investing in Subject To Properties
Under the right circumstances, subject to properties can be profitable investments. However, people who make these types of deals generally specialize in these types of investments. Because not all lenders favor subject to arrangements, it's important to familiarize yourself with the risks and benefits associated with this type of investment.
- Eliminates or reduces real estate transfer tax in some states because the mortgage note stays in the seller's name
- Investors don't need to refinance, so their personal credit score is unaffected. According to expert real estate investor Simon Volkov, subject to agreements help investors circumvent the strict lending requirements imposed by banks after the subprime mortgage meltdown.
- Allows home owners to bypass real estate broker fees
- Helps sellers avoid foreclosure
- The lender might enforce a due on sale clause, forcing the investor to pay the entire balance
- The home owner might file bankruptcy, which can impact the home if it gets caught up in bankruptcy court proceedings
- If the seller is seriously behind on his payments, the home might be encumbered by creditor's liens
Handled properly, a subject to agreement can benefit both buyers and sellers. Due to the complexity involved, however, they are probably best left to experienced investors. According to real estate expert Milton B. Yates, it's also crucial for investors to determine whether the home owner's mortgage is fixed or variable, as an adjustable rate might turn a good deal sour very quickly.
Proceed With Caution
Whether you hear them referred to as mortgage assignments or subject to agreements, make no mistake that these are advanced real estate transactions. Subject to agreements can be quite lucrative, but they also come with a steep learning curve. Before you pledge your hard-earned dollars, make sure you fully understand your risks and obligations.