Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentHard
A Florida real estate investor is evaluating a property's potential for appreciation and rental income. The property is subject to an existing mortgage that the investor plans to take over, but the original borrower will remain primarily liable for the loan. This arrangement is known as:
- AAssumption 'with novation'
- BDeed in lieu of foreclosure
- CNovation
- DAssumption 'subject to' the mortgage
Show answer & explanationAnswer & explanation
Correct answer: D. Assumption 'subject to' the mortgage
When a buyer takes title to a property 'subject to' the existing mortgage, they agree to make the payments, but the original borrower remains primarily liable in case of default. The buyer does not assume personal liability for the loan, nor is the original borrower released.
Why the other options are wrong
- A. Assumption 'with novation' would mean the original borrower is released from liability, which contradicts the scenario.
- B. A deed in lieu of foreclosure is a voluntary transfer of property to the lender to avoid foreclosure, not an assumption of debt.
- C. Novation is a complete substitution of a new party for an old one, releasing the original borrower.
Assumption 'Subject To' Mortgage
A buyer takes title to a property with an existing mortgage but does not assume personal liability for the loan. The original borrower remains primarily liable.
- Buyer makes payments, but is not legally obligated to the lender.
- Original borrower's credit is still on the line.
- If buyer defaults, lender forecloses on property, but can pursue original borrower for deficiency.
Memory trick: Subject To: Original is STill liable, like a shadow.