Assuming an FHA Loan from a Seller who does Not get a Release?

2 Replies

Hi, I have a question I hope someone can answer.

Say a seller has $80,000 left on an FHA loan. They just want someone else to to assume the mortgage payments and give $8,000 as a down payment. So, a total purchase price of $88,000.

They are transferring the title to the buyers name at closing for just the $8,000 down.  They are not getting a release of liablility nor is the buyer getting approved to take over the assumption.  The buyer would just pay the seller the mortgage amount each $.

What happens if the seller defaults or dies or something?  Since the title is no longer in their name, but is in the buyer's name who does not have a promissory note attached to them, how would it work in terms of foreclosing?  Moreover, if the seller got caught and had an acceleration clause acted upon, thus making them liable to pay the loan in full, how would it effect the buyer (who has the title in their name).  Just curious as I have an investor buddy that just had the scenario posed to him by the sellers (it was due to a death in their family is the reason they are wanting to do this).  Thanks!

@Aaron Smith

Not sure if things are different in North Carolina, but in Michigan we are a lien theory state. So taking a house Subject to, is pretty simple. Your friend should set it up to were he is making the mortgage payments directly to the back to avoid having the seller take payments and not giving it to the bank, causing him to default. The bank still has a lien on the house irregardless of who holds the title so if there was a default on the mortgage the bank can foreclose on the house just like they normally would. If the bank did decide to exercise the due on sale clause, the seller would have to pay off the mortgage or get foreclosed on, or your friend could buy the house outright for what is owed on it via cash or new mortgage. Typically banks wont exercise the due on sale clause if the note is still performing. I hope that makes sense, and answered your questions. 

@Aaron Smith @Nicholas Myers

Aaron, the way Nicholas Myers described the process in MI is how NC would also see it. It's a Sub-To deal with risks to both parties. The NC AG office looks very unfavorably on Sub-To deals, btw. 

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