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A national portion of the real estate exam requires you to clearly distinguish between a buyer
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assuming a mortgage and taking titles subject to an existing mortgage, because the legal
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liabilities for your clients are worlds apart.
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In a mortgage assumption, the buyer is formally stepping into the shoes of the original borrower.
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This is not a casual agreement between parties, but a structured legal process that requires
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the lender's express permission.
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The buyer must sign the existing promissary note or a specific assumption agreement, which
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creates a direct legal obligation between the buyer and the lender.
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Because the buyer has signed the note, they become personally liable for the debt.
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If the property eventually goes into foreclosure and the auction price is not high enough
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to satisfy the remaining balance, the lender has the right to pursue the buyer for a deficiency
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This means the buyer's personal assets and other income could be seized to pay off the
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In many cases, the original seller remains secondarily liable unless a novation occurs.
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Novation is a critical exam term to remember, because it represents the only way a seller
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is truly off the hook.
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It is the legal act of replacing an old contract with a new one, or replacing one party with
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another, effectively releasing the seller from all future obligations to the lender.
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On the other hand, taking title subject to an existing mortgage is a scenario where
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the buyer acquires the property but never signs the promissary note.
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The existing mortgage stays in the seller's name and the seller remains the party personally
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liable to the lender.
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The buyer acknowledges the debt exists and agrees to make the monthly payments to protect
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their interest in the property, but they have no legal contract with the lender.
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If the buyer stops paying, the lender will still foreclose because the mortgage is a
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lien against the land itself, but the lender cannot sue the buyer for any leftover debt.
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The lender's only recourse for a deficiency would be against the original seller who signed
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For the exam, you must remember that in a subject to transaction, the buyer's risk is limited
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to the equity they have in the home.
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While the seller's credit remains on the line, the existence of an alienation clause
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often called a do-on-sale clause is the primary reason these transactions are rare in modern
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conventional lending.
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This clause gives the lender the right to demand immediate and full payment of the loan
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if the property is sold or transferred.
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Most conventional mortgages today include this language, which effectively blocks a buyer
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from assuming the loan or taking its subject to without the lender's intervention.
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However, government-backed loans like FHA and VA loans are often exception points you
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might see on the test.
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These loans are generally considered assumable.
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Provided the new buyer can meet the credit-worthiness standards of the agency.
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To keep these straight during your exam, use the pneumonic phrase that you assume the liability
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but stay subject to the lien.
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When a buyer assumes they take the legal burden of the debt, when a buyer takes title subject
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to, they are simply moving in under the shadow of the existing lien without taking the
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legal burden of the note.
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Watch out for trick questions that describe a foreclosure and ask who the lender can
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sue for a deficiency.
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If the facts state the buyer assumed the loan, the buyer is the target.
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If the facts state the buyer took the property subject to the loan, the seller is the target.
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Mastering this distinction ensures you won't be tripped up by the nuanced language used
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in the finance portion of the national real estate exam.
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One final detail to monitor on the exam is the role of the lender's consent.
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Assumption almost always involves the lender vetting the new buyer to ensure they are a
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good credit risk, similar to a standard loan application.
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In contrast, subject to transfers often happen between a seller and buyer without the lender
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being notified, which is exactly what triggers the risk of the alienation clause being enforced.
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If you see a question asking which method provides the most protection for a seller, the
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answer is always assumption with a novation, as that is the only path that completely
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severs the seller's liability to the original lender.
