The Pitfalls of Subject To The Existing Mortgage

So by now, depending if you are the buyer or the seller you might be asking yourself “What is the catch and how do I protect myself” if using subject to the existing mortgage as a way to buy or sell a piece of real estate.

The Due on Sale Clause

The due-on-sale clause can potentially be one of the biggest pitfalls. This is a clause in the original loan documents of the seller. In essence, it says that if title is transferred or changes hands, the bank has the right to call the loan due and in full. Keep in mind, though, I said “right to call the loan,” but the real question is how often do they? Very rarely do banks accelerate these loans. What may trigger this or provide incentive for the bank would be lack of mortgage payments. More often than not, banks happily accept on-time payments rather than dealing with the costly process of calling a loan due and attempting to foreclose. Banks prefer money, not houses!

918 Home Solutions has helped many Tulsa homeowners in need of selling their home through Subject To The Existing Mortgage.  We have never had a bank call the loan due. We have always made the mortgage payment on-time. We service the mortgage through the escrow company making sure everything is done above board.

Title Insurance and Mortgage Servicing

Getting title work done and title insurance is essential when buying a property Subject To The Existing Mortgage. If you’re the seller, consult with the escrow officer so you can protect yourself against the buyer not making payments on time.

Make sure you also set the mortgage payment up to be serviced through the escrow company so, as the seller, you know the mortgage is being paid on time.

As the seller, ask the escrow officer about doing  a “mirror wrap” so in case the buyer does not make the payments, you can get your property back. A “mirror wrap” accomplishes the same thing but has better protection for the seller.

Homeowner’s Insurance

Making sure the home is insured is essential. Most mortgage payments have in impound account which includes paying the property taxes and homeowner’s insurance when making the mortgage payment.

It is best for the seller not to cancel the homeowner’s insurance since it is being paid through the mortgage.

If the homeowner’s insurance is cancelled, it is a trigger to the bank and can cause the bank to investigate triggering the due-on-sale clause and the bank calling for the note to be paid in-full.  It is best to keep the current insurance policy in place.

It is easier to have all parties named as insured or additional insured on the one policy, including previous and current owners. This is at NO expense to the seller.

Types Of Mortgages You Can and Cannot Sell Subject To Existing Mortgage

When selling a property Subject To The Existing Mortgage, the mortgage needs to be a conventional loan. If you have an FHA or VA loan you can’t sell your property subject to the existing mortgage. The government loans are very strict about what can be done with an FHA or VA loan and the title companies wont insure the property at the sale if you have an FHA or VA loan.

Another thing to be aware of… If you have a Home Equity Line of Credit (HELOC) it will need to be paid off through escrow when selling Subject To The Existing Mortgage. As the buyer, you want the HELOC paid off at closing because with an open line of credit, the seller could pull money from the line which can cause plenty of cascading issues. Once ready to pay off the mortgage and/or sell the property, additional funds would be needed to pay off the line of credit ON TOP of the balance of the mortgage. Title companies will usually require HELOC’s to be paid off and closed when buying subject to the existing mortgage.

In Summary

There are pros and cons to selling a house, multi-family property, land or mobile home through Subject To The Existing Mortgage. Make sure you fully understand what you are doing if you are the seller and have the escrow/title company working in your best interests to protect you.