Legal Definitions - subject to

In real estate, the term subject to describes a specific way a new owner acquires property that already has an existing loan, such as a mortgage, attached to it.

When a property is purchased "subject to" an existing loan, it means:

• The new owner agrees to take title to the property.
• The new owner also agrees to make the payments on the existing loan.
• However, the original borrower who took out the loan remains legally responsible to the lender for the debt. This means if the new owner fails to make payments, the lender will pursue the original borrower for the money.
• The property itself still serves as collateral for the existing loan, meaning the lender can still foreclose on the property if payments stop, potentially causing the new owner to lose it.

This arrangement is different from "assuming" a loan, where the new owner takes over full legal responsibility for the debt, usually requiring the lender's approval and releasing the original borrower from their obligation.

Examples of "Subject To"

• Family Property Transfer: Imagine a father wants to transfer ownership of his vacation cabin to his adult son. The cabin has an existing mortgage in the father's name. The son agrees to take ownership of the cabin and continue making the monthly mortgage payments directly to the bank.

  How it illustrates "subject to": The son is acquiring the cabin "subject to" the existing mortgage. If the son, for any reason, stops making the payments, the bank will still hold the father (the original borrower) legally responsible for the debt. The bank could also initiate foreclosure proceedings on the cabin, even though the son is the new owner.

• Investment Property Sale: An investor owns a small rental duplex with an existing mortgage. They decide to sell the duplex to another investor who wants to add it to their portfolio. The new investor agrees to purchase the property and continue making the payments on the existing mortgage, which remains in the original investor's name.

  How it illustrates "subject to": The new investor is buying the duplex "subject to" the current mortgage. If the new investor experiences financial difficulties and stops making payments, the lender will demand payment from the original investor. Furthermore, the lender could foreclose on the duplex, leading to the new investor losing their ownership.