Deed Transfer Depends Upon Your Lender's Decision to Exercise Your Mortgage's Due-on-Saleï¿½ Clause
Because a mortgage allows a person to use his or her property as collateral when applying for a loan, homeowners generally need to have their name on the deed to any house they wish to mortgage, if only to establish the property as legitimate collateral. Most mortgages contain a "due-on-sale" clause. This "due-on-sale" clause allows a lending institutionâ€"usually a bankâ€"to demand an immediate payment of all remaining balance due on a mortgage if the house is ever sold. In other words, if you sell your house and you have not finished paying your mortgage, then your bank has the right to call on you to pay your mortgage in full at the time of your homeâ€™s sale.
The key word in most "due-on-sale" clauses is right as opposed to obligation. In other words, your lending institution is free to choose to call in the loan at its own discretion. Most banks will decide not to call the mortgage due, as long as payments continue to be made in a timely manner. This is because banks want money, not real estate. If your lender calls in your mortgage they run the risk of foreclosure. Foreclosure not only means a bank will have a poor performance loan on its books, it also means the bank will need to increase its reserves and risks inheriting your property.
Mortgage Responsibility is Determined By the "Subject-To" Clause in Your Homeâ€™s Purchase Sales Agreement
By establishing a "subject-to" clause in the Purchase and Sales Agreement of your house, you, as the Seller, and your Buyer agree that the Buyer will purchase your home "subject-to" the existing balance remaining on your mortgage. While the mortgage remains in your name, the Buyer agrees to continue making payments on your pre-existing mortgage. As long as payments continue to be made by the new Buyer on a timely basis, most banks will not object.
These kinds of real estate ventures are desirable to "motivated" Sellersâ€"homeowners who want to move, need cash quickly, are generally behind in their mortgage payments, and may already be facing foreclosure. By agreeing to pay the mortgage while it remains under the Sellerâ€™s name, a Buyer allows the motivated Seller a quick way out of a financial pickle. Additionally, if the Buyer fulfills his or her promise to make "subject-to" mortgage payments on time, the motivated Sellerâ€™s credit score will improve as well.
Motivated Sellers Should Be Careful When Selling Their House While Keeping the Mortgage in Their Name
Depending on the language of an individual "subject-to" clause within a Purchase and Sales Agreement, a Seller remains ultimately responsible for the mortgage, even after he or she has sold the house. As long as the original mortgage remains under the Sellerâ€™s name, the "subject-to" Buyer is technically not legally responsible to ensure that payments are made to the lender. However Buyers who "walk away" from their "subject-to" mortgage payments run the risk of ruining their reputation in the real estate community, being reported to the Better Business Bureau, and losing any cash that they having invested into the house itself if the house is repossessed.