A buyer who purchases a piece of property secured by a mortgage either takes the property “subject to the mortgage,” or he “assumes the mortgage.”
Subject to the Mortgage
A buyer who takes the property subject to the mortgage is not liable for the mortgage debt. The seller agrees to continue paying the mortgage.
Example: I sell a piece of property to my friend, and my friend takes the property subject to the mortgage. It is my responsibility to continue making the mortgage payments. I (the seller) am liable for any mortgage debt, and my friend (the buyer) is not. However if I don’t pay, the mortgage will be foreclosed and my friend will lose his investment in the land.
Assuming the Mortgage
A buyer who assumes the mortgage becomes primarily liable on the mortgage. It is the responsibility of the buyer to make the remaining mortgage payments.
Important note: Even though a buyer who assumes the mortgage becomes primarily liable, the seller is still secondarily liable on the mortgage (as a surety).
Example: I sell a piece of property to my friend, and my friend assumes the Bank of America mortgage. My friend is primarily liable on the mortgage and it is his responsibility to pay it. However, if he does not then Bank of America can hold me liable for the debt because I am still secondarily liable.
Note: When the buyer assumes the mortgage, the seller will not be secondarily liable if he is given a release by the bank (sometimes called a novation). However, the seller will remain secondarily liable on the mortgage unless the facts specifically tell you that the seller was given a release or novation.
Quick Tip: People most commonly use the word assume to mean to take as true (“I assume McDonalds will be open.”). Another definition of assume though is to take on, or take up (“I assumed the responsibility.”) I always think of this second definition to help me remember these two concepts when I encounter them on MBE questions. Just remember that if the buyer assumes the mortgage he is taking on the mortgage debt (just like the definition of the word), and the buyer is primarily liable (with the seller still secondarily liable).
What To Understand
- A buyer who purchases a piece of property secured by a mortgage either takes the property subject to the mortgage or assumes the mortgage.
- A buyer who takes the property subject to the mortgage is not liable for the mortgage debt. It is the responsibility of the seller to continue paying it.
- A buyer who assumes the mortgage is primarily liable for the mortgage and is responsible for making the remaining mortgage payments. However, the seller remains secondary liable on the mortgage as a surety (unless the seller is granted a release, or novation).