Mortgages and Property Sales

Satisfaction of Mortgage

  • Selling a property with a mortgage involves knowing how the transaction will affect existing financial obligations.
    • A key concept is the 'satisfaction of mortgage', which typically occurs when a mortgage is paid off and the lien is removed from the property title.

Subject to Loans

  • Properties can be sold 'subject to the mortgage'. This means:
    • The buyer takes title to the property.
    • The original mortgage stays in place and is not paid off at the time of sale.
    • The lending institution is not notified of the change in the title holder.
    • This practice can violate the terms of many mortgages.
  • Benefits of selling a property subject to the mortgage include:
    • Allows buyers to obtain the property without incurring new loan origination costs and delays.
    • Buyers can often acquire property more quickly because they bypass traditional financing processes.
  • A 'subject to transaction' effectively leads into discussions about wraparound mortgages:
    • A wraparound mortgage allows a new loan to encompass an existing mortgage, but operates with fewer legal protections compared to conventional transactions.

Loan Assumption

  • The act of taking over another borrower's loan is termed 'loan assumption'. In this context:
    • Most lenders require approval for any loan assumption.
    • When a buyer assumes a seller's loan, they inherit the liability of that loan, relieving the seller of their obligation.
  • Reasons for assuming a loan include:
    • It can be beneficial for buyers, particularly in scenarios where interest rates are increasing.
    • For example, if the seller's original loan was issued at a lower interest rate (e.g., 3.5%) and market rates rise,
    • The buyer can secure a financial advantage by assuming the seller's existing loan and purchasing the seller's equity.
  • Equity: The difference between the property's market value and the outstanding loan balance is known as equity. In a transaction where a buyer assumes a seller's loan, the buyer essentially benefits from acquiring both the property and any equity built by the seller if market conditions are favorable.