Mortgage loans on real estate are secured by recording a lien on the property at the town or city hall, registry of deeds, or other specified place, depending on local laws. Selling all or partial interest in real estate when there is a mortgage will be "subject to a mortgage or deed of trust." This means that the property has a recorded lien against it, placing a minor "cloud" on the title. Should the borrower default on this loan, the lender has the right to foreclose upon and take possession of the real estate -- and the buyer may get nothing.
"Subject to" Language
In real estate and other financing situations, you will often encounter "subject to" language. Understanding its meaning will help you become a more knowledgeable consumer. When you see real estate -- or anything else -- "subject to" something else, it means a condition already exists and, more or less, is part of the "package." You must therefore base your decision to buy or not to buy with this condition in mind.
Most homeowners have mortgage loans and most mortgage loans contain "due on sale" provisions. Therefore, most home sales are subject to an outstanding mortgage or a deed of trust, depending on the state in which the home exists. Because of the prevalence of both mortgages and "due on sale" clauses, most real estate is sold subject to a recorded lien.
Buyers of property "subject to an existing deed of trust" must consider their options carefully. Because most mortgage loans have a "due on sale" provision, this means that the money you pay for the home must be used to pay off the seller's existing loan balance. Depending on where you live, this is routinely handled by professionals involved with the sale -- for example, by an escrow company handling the transaction. The lender's lien is then removed.
If for any reason the lender does not receive full payment at the time of the sale, the lender has the right to consider the loan in default and to immediately foreclose. Purchasing a property subject to an existing deed of trust -- that is, in an unusual case in which the first lender has not been paid off at the time of sale -- means that you must make all payments to the seller on time, as agreed. However, you will not necessarily know whether your seller is using your money to make the mortgage payments on time.
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