Subject to the existing Mortgage

[JeffInCO]

What is the name of your state? AZ

Hi. I am considering a house that the owner is willing to sell under the above condition: Subject to the existing mortgage, meaning the original borrower is still liable for the mortgage.

I already know that this is not usually a good deal for the seller, unless they are facing foreclosure. However, I'm wondering about the risks to the buyer (me)? Also, I don't think the current owner is in fact in foreclosure. See, it is owned by an investment company, and what I think happened is that they originally bought the house from the first owner using a subject to deal, and are now planning to pass it on in the same manner. In other words, they won't be responsible for the loan, as it's the original owner that still is.

The risk I am aware of is that the lien holder may decide to exercise the due on sale clause, and call the loan due when I buy it. I would be putting a substantial amount of money down, about 20% of the total sales price. What is the actual likelihood that the bank will do that? If they do, I'm pretty certain I would NOT be able to refinance the loan. So, if the worse case happens- they call the loan due, and I cannot obtain financing for the existing loan, what would happen, from a legal standpoint? They would still be receiving the required monthly payment, but they wouldn't have received the full loan amount due because of exercising the clause. Would the loan then be considered to be in default? Would it go into foreclosure? I realize it wouldn't affect my credit rating, but if the house is foreclosed out from under me, I would lose my substantial down payment, wouldn't I? Is there any time limit on exercising the clause? Say they decided not to do so at the sale of the property, but then interest rates went way up 3 years down the road. Could they exercise the clause then?

Is there any way for me to protect myself in this event? The offer to purchase has not yet been made, so if there is some wording I could put into the contract to protect me, then that is still a possibility.

Also, are there any other risks I should be aware of as the buyer? I already plan to have an appraisal done, to verify that the house is actually worth what the seller is asking. I'm also going to have an inspector check it out. I also will get title insurance. Just because I am thinking of buying using an unorthodox method of financing, doesn't mean I am going to skimp on protecting myself.

The deal appears to be extremely good. I can get what appears to be a very expensive home (again, I will verify this with an appraisal) for a very under-market price. I would also get it for almost nothing in closing costs- only those things that I "buy" to protect myself, such as the appraisal, the inspection, title insurance, etc. On the other hand, there is the old adage of: if it sounds too good to be true, then it probably is.

Sorry to be long winded. I just wanted to try to present the whole story.What is the name of your state?

[FlyingRon]

If the mortgage is not assumable and you haven't gone through the assumption, buying subject-to is extremely dangerous for the reasons you have discovered as well as a few more.
The mortgage company probably will find out when they notice the changes in the homeowners insurance policy which they get a copy of.

Is there some reason you're unable to get financing?

[seniorjudge]

Originally Posted by FlyingRon

If the mortgage is not assumable and you haven't gone through the assumption, buying subject-to is extremely dangerous for the reasons you have discovered as well as a few more.
The mortgage company probably will find out when they notice the changes in the homeowners insurance policy which they get a copy of.

Is there some reason you're unable to get financing?

Jeff, this sounds like something to stay away from.

[CharlotteInvest]

yes you should stay away from this deal unless you speak to the lender and get permission to do a lease option and eventually be a position to get financing. There are other ways but too complicated to explain here.