California Real Estate Practice Exam

What is the difference between buying property and assuming an existing mortgage or buying the property subject to an existing mortgage?

1. The interest rate on the mortgage changes.

2. The seller is still liable to the lender under the subject to situation.

3. The buyer immediately gains full equity in the property.

4. The property cannot be sold until the mortgage is fully paid.

The correct answer is: The seller is still liable to the lender under the subject to situation.

The distinction between buying property by assuming an existing mortgage versus purchasing it subject to an existing mortgage primarily revolves around liability and responsibility for the mortgage debt. When a buyer assumes an existing mortgage, they take on the responsibility of repaying the mortgage directly to the lender. This means the lender relinquishes the original borrower's liability, effectively putting the buyer in the position of the borrower. In this scenario, the original seller is released from the mortgage obligation, and the buyer becomes fully accountable for making future payments. In contrast, buying a property subject to an existing mortgage means that the buyer takes possession of the property and continues to make the mortgage payments, but the seller remains liable to the lender. If the buyer defaults on the mortgage, the lender can pursue the original seller for the debt because the seller's name is still on the loan. This creates a significant difference in risk and liability. Therefore, the correct answer highlights that in the "subject to" situation, the seller retains their obligation to the lender, distinguishing it from an assumption where that obligation is transferred to the buyer.