When you read or hear the term, “subject to” in connection with real estate, it typically means to acquire title to a property subject to the current owner’s existing mortgage. Typical scenario: A buyer contracts to buy a seller’s property subject to the seller’s existing mortgage and the buyer promises to make payments on the seller’s existing mortgage until it is paid in full. [Note: This is NOT a formal loan assumption which would require the lender’s approval of the buyer and the transfer of title.] The seller often signs a quitclaim deed to transfer the title to the buyer, but doesn’t inform the seller’s lender. Why? To avoid triggering the due-on-sale clause which would require the seller to pay off the mortgage. The concealment of the sales transaction from the lender is where the fraud typically toccurs.
After transferring the title to the buyer, the seller no longer owns the property, but the seller’s mortgage still exists. In the event of a default of the existing mortgage, the lender would potentially have no collateral to sell to pay off the debt. As the new owner of the property, the buyer might try to (1) borrow money using the house as collateral, (2) sell the property to someone willing to pay more for the property, or (3) lease the property. While the buyer might pay off the seller’s mortgage after reselling the property, there is no guarantee that this will occur. Often,, the buyer only makes mortgage payments when rent is collected and rarely makes repairs, leading to a delinquent mortgage in the seller’s name and a property that falls into disrepair.
Transferring a property subject to the seller’s existing mortgage without disclosure to the lender is generally a form of LOAN FRAUD and no broker should participate in a “subject to” transaction as a broker, a buyer or a seller without legal advice from a qualified real property attorney. If a broker cannot prove with documentation that they informed the seller and the mortgage company about the “subject to” transaction and the transfer of title to the property, then there are possible violations of N.C.G.S. § 93A-6(a)(1), (8) and (10) which authorize the Commission to pursue disciplinary action against a licensee involved in this type of transaction.