PastPaperHero | Mortgages/security devices - Assumption and transfer subject to

Learning Outcomes

This article explains mortgage transfers where property is sold with an existing loan, including:

Clearly distinguishing among assumption, subject-to conveyances, and silent deeds, and relating each to modern default rules tested on the MBE.
Determining which parties—the original mortgagor, the grantee, or both—are personally liable on the note and in what capacity (primary obligor vs. surety) after a transfer.
Applying suretyship doctrine when an assuming grantee later defaults or when the lender modifies the loan or impairs the collateral, and identifying when the mortgagor is discharged.
Evaluating the operation and enforceability of due‑on‑sale clauses, including when they allow acceleration, how they interact with assumptions and subject-to transfers, and common Garn–St. Germain exam fact patterns.
Identifying and comparing lender remedies—foreclosure, in rem recovery, and deficiency judgments—under different transfer structures and jurisdictional rules.
Recognizing how assignments of the note and mortgage affect the rights of lenders, assignees, and borrowers, including the role of a holder in due course.
Using concise analytic steps to approach mortgage-transfer multiple-choice questions, focusing on liability allocation, foreclosure rights, and the impact of contractual clauses.

MBE Syllabus

For the MBE, you are required to understand mortgages and other security devices, with a focus on the following syllabus points:

The nature of the mortgage obligation: note versus mortgage, and personal versus in rem liability
Transfers by the mortgagor: assumptions and subject-to conveyances, and their effect on personal liability
The original mortgagor’s status as a surety after a grantee’s assumption, and how modifications or impairments of security affect that surety
Due-on-sale clauses: enforceability, acceleration rights, and interaction with grantee liability
Transfers by the mortgagee (assignment of note and mortgage) and the role of holders in due course
Foreclosure consequences and deficiency judgments under different transfer arrangements

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

Mortgagor conveys mortgaged property to Grantee "subject to" the existing mortgage held by Bank. Mortgagor makes no further payments, and Grantee also fails to make payments. Which statement is correct regarding Bank's rights upon default?
1. Bank can sue only Grantee personally for the debt.
2. Bank can sue only Mortgagor personally for the debt.
3. Bank can sue both Mortgagor and Grantee personally for the debt.
4. Bank can foreclose on the property but cannot sue Grantee personally for the debt.
Mortgagor obtained a loan from Lender secured by a mortgage on Blackacre. Mortgagor later sold Blackacre to Buyer, who expressly agreed in the purchase contract and deed to "assume and agree to pay" the mortgage loan. Buyer subsequently defaulted. Which party is primarily liable to Lender for the debt?
1. Mortgagor is primarily liable, and Buyer is secondarily liable.
2. Buyer is primarily liable, and Mortgagor is secondarily liable as a surety.
3. Mortgagor and Buyer are jointly and severally liable.
4. Neither party is personally liable; Lender's only remedy is foreclosure.
A clause in a mortgage instrument that permits the lender to demand full payment of the entire loan balance if the mortgaged property is transferred without the lender's permission is known as:
1. An acceleration clause.
2. An exculpatory clause.
3. A due-on-sale clause.
4. A subordination clause.

Introduction

When real property encumbered by a mortgage is sold or otherwise transferred, the existing mortgage remains on the property. The critical question for MBE purposes concerns the liability for the mortgage debt after the transfer. The transferee (the grantee or buyer) may either formally agree to take responsibility for the debt (assumption) or simply acquire the property with the mortgage remaining as a lien against it (subject to). The distinction significantly impacts the personal liability of both the original mortgagor and the transferee.

To analyze these questions, you must separate two distinct relationships:

The note (or loan) creates a personal obligation between borrower and lender.
The mortgage (or deed of trust) creates a security interest in the land, giving the lender in rem rights (foreclosure) against the property.

Key Term: Mortgage
A security interest in real property that secures repayment of a debt (usually evidenced by a promissory note). It gives the lender the right to foreclose on the property if the borrower defaults.

Key Term: Mortgagor
The borrower who grants the mortgage; usually the property owner who signs the note and the mortgage.

Key Term: Mortgagee
The lender or creditor who receives the mortgage interest as security for repayment of the note.

When the mortgagor later sells the property, the mortgage stays with the land, and the buyer takes title either:

By assuming the mortgage (agreeing to become personally liable on the note), or
Subject to the mortgage (recognizing the lien but not agreeing to personal liability).

From an exam standpoint, almost every mortgage-transfer question boils down to three things:

Who can the lender sue personally on the note?
Against whose property can the lender foreclose?
How do due-on-sale clauses and later modifications affect these rights?

Key Term: Deficiency Judgment
A personal judgment for the unpaid balance of the mortgage debt after foreclosure sale proceeds have been applied to the debt.

Assumption of the Mortgage

A grantee assumes the mortgage when they expressly or impliedly agree to take on personal liability for the mortgage debt. This promise is typically made to the mortgagor-seller, but the mortgagee (lender) is considered a third-party beneficiary of this promise.

Key Term: Assumption of Mortgage
An agreement by a grantee of mortgaged property to accept personal liability for payment of the mortgage debt, in addition to the original mortgagor.

Creating an Assumption

On the facts, look for language such as:

“Grantee assumes and agrees to pay the existing mortgage,” or
“Grantee assumes the mortgage indebtedness.”

Key points:

Express assumption language in the deed is the cleanest case.
A separate written contract between seller and buyer can also create an assumption; the lender can enforce it as a third-party beneficiary.
If the deed is silent, the modern majority rule presumes the grantee does not assume personal liability; the grantee simply takes subject to the mortgage.

Liability After Assumption

Grantee Becomes Primarily Liable: Upon assumption, the grantee becomes primarily and personally liable to the lender for the mortgage debt. The lender can sue the grantee directly on the note if loan payments are not made.
Original Mortgagor Becomes Secondarily Liable: The original mortgagor is not released from liability merely because the grantee assumed the debt. Instead, the original mortgagor becomes secondarily liable as a surety. If the grantee defaults, the lender can sue the original mortgagor, but the mortgagor then has a right of reimbursement (and often subrogation) against the defaulting grantee.
Both Parties Are Typically Liable to the Lender: Unless the lender expressly releases one debtor or agrees to a novation, both the original mortgagor and the assuming grantee are personally liable.

Key Term: Surety
A person who is secondarily liable for another’s debt; if the principal debtor defaults and the surety pays, the surety is entitled to reimbursement and may be subrogated to the creditor’s rights.

Key Term: Novation
An agreement among the creditor and both debtors that substitutes a new obligor (e.g., the grantee) and releases the original debtor, extinguishing the original obligation.

Lender’s Remedies After an Assumption

If the grantee assumes and then defaults, the lender may:

Foreclose on the property (in rem), and
Seek a deficiency judgment against:
- The assuming grantee (primary obligor), and
- The original mortgagor (surety), unless released or discharged.

The lender can choose whom to sue first and is not required to exhaust remedies against the grantee before pursuing the original mortgagor. However, as between mortgagor and grantee, the grantee bears the economic burden if there has been an assumption.

Suretyship Consequences of Assumption

Once the grantee assumes, the original mortgagor becomes a surety. Suretyship law then comes into play:

Modification Discharges Original Mortgagor: If the lender and the assuming grantee subsequently modify the terms of the loan obligation (for example, by increasing the interest rate or extending the maturity date in a way that is more burdensome), the original mortgagor is discharged from liability as surety, unless the mortgagor consents to the modification.
Impairment of Security: If the lender knowingly impairs the mortgage security (for example, by releasing part of the mortgaged property from the lien or failing to protect the collateral), the mortgagor’s surety obligation is discharged to the extent of the impairment.

Exam Warning

Remember the surety relationship. If the lender modifies the loan agreement with the assuming grantee without the original mortgagor's consent, the original mortgagor is discharged. This is a common exam point.

Key Term: Assignment of Mortgage
A transfer by the mortgagee of its rights in the note and/or mortgage to another creditor (the assignee), who then steps into the mortgagee’s shoes.

Even if the mortgagee assigns the note and mortgage to a new lender, the assumption and suretyship structure remain in place; the assignee takes subject to the existing assumption/surety relationship.

Worked Example 1.1

Maria borrowed $400,000 from Bank, signing a note and mortgage on Blackacre. Later, Maria sold Blackacre to Ben. The deed stated that Ben “assumes and agrees to pay in full the mortgage in favor of Bank.” Bank did not release Maria. Ben stopped paying. Bank foreclosed; the sale brought$ 350,000, leaving a $40,000 deficiency. Bank sues Maria for the deficiency. Maria pays and then sues Ben.

Answer:
When Ben assumed the mortgage, he became primarily liable on the debt. Maria became a surety. Bank can sue either or both debtors, so Bank may recover the deficiency from Maria. However, because Maria was in the position of surety and paid a debt for which Ben was principal, she has a right to reimbursement (and subrogation) from Ben for the $40,000 she paid.

Transfer "Subject To" the Mortgage

A grantee takes title subject to the mortgage if the deed merely recites the existence of the mortgage or is silent regarding liability. In this scenario, the grantee does not agree to be personally liable for the debt.

Key Term: Subject To Mortgage
A transfer of mortgaged property where the grantee takes title subject to the existing mortgage lien but does not assume personal liability for the mortgage debt.

Creating a “Subject To” Transfer

Look for language such as:

“Conveyance is subject to the existing mortgage in favor of Bank,” or
A simple recital: “subject to all encumbrances of record,” with no promise by the grantee to pay.

If the deed is silent regarding the debt, the default rule in most jurisdictions is that the grantee takes subject to the mortgage and does not assume personal liability.

Liability When Taking "Subject To"

Grantee Has No Personal Liability: The grantee is not personally liable for the mortgage debt. The lender cannot sue the grantee on the note for payment if the loan defaults.
Original Mortgagor Remains Personally Liable: The original mortgagor remains personally and primarily liable on the note. The transfer does not affect the mortgagor’s personal obligation to the lender.
Foreclosure Risk: Although the grantee is not personally liable, the mortgage remains a lien on the property. If payments are not made (either by the grantee to protect their investment, or by the original mortgagor), the lender can foreclose on the property. The grantee risks losing the property through foreclosure if the debt is not paid.

In practice, even a subject-to grantee will often make payments to prevent foreclosure, but does so to protect their equity, not because of personal liability on the note.

Effect on Deficiency Judgments

After a subject-to transfer:

The lender may foreclose against the property.
If the foreclosure sale proceeds are insufficient, the lender may obtain a deficiency judgment against the original mortgagor only, not against the subject-to grantee.

The grantee’s entire risk is loss of the property and any equity built up in it.

Worked Example 1.2

Oliver purchased Blackacre for $300,000, financing$ 250,000 with a mortgage from Bank. Later, Oliver sold Blackacre to Priya for $320,000. The deed stated that the conveyance was "subject to the existing mortgage in favor of Bank." Priya made payments for a year but then defaulted. Bank foreclosed and the sale yielded$ 230,000, leaving a $15,000 deficiency on the loan balance. Can Bank recover the deficiency from Priya? Can Bank recover from Oliver?

Answer:
Bank cannot recover the deficiency from Priya personally. Because Priya took the property "subject to" the mortgage, she did not assume personal liability for the debt. Bank can recover the $15,000 deficiency from Oliver personally. Oliver remained primarily liable on the original note even after transferring the property subject to the mortgage.

Worked Example 1.3

Liam borrows $200,000 from Lender and grants a mortgage on Greenacre. Liam later sells Greenacre to Grace. The deed states: “Greenacre is conveyed to Grace, subject to a mortgage in favor of Lender.” Grace stops paying; Liam also makes no payments. Lender forecloses, and the sale price is$ 190,000. The jurisdiction allows deficiency judgments.

Answer:
Grace took subject to the mortgage; she has no personal liability. Lender can foreclose on Greenacre (which it did) and may then seek a $10,000 deficiency judgment against Liam, the original mortgagor. Grace’s only loss is her equity in Greenacre.

Assumption vs. Subject To: Practical Comparison

For exam purposes, keep these contrasts in mind:

Who is personally liable to the lender?
- Assumption: Both the assuming grantee (primary) and the original mortgagor (surety) are personally liable, unless a novation releases one of them.
- Subject to: Only the original mortgagor is personally liable.
What can the lender reach?
- In both cases, the lender can foreclose on the property.
- After foreclosure:
  - Assumption: Deficiency judgment can be sought against either or both mortgagor and assuming grantee.
  - Subject to: Deficiency judgment can be sought only against the original mortgagor.
Status of original mortgagor:
- Assumption: Surety as between mortgagor and grantee.
- Subject to: Principal obligor as to both lender and grantee.
Effect of loan modifications between lender and grantee:
- Assumption: Unconsented modifications that materially increase the risk discharge the mortgagor-surety.
- Subject to: Mortgagor is still the principal obligor; modification issues are less likely to be framed as suretyship problems.

Due-on-Sale Clauses

Most modern mortgages contain due-on-sale clauses. These clauses give the lender the option to demand full payment of the entire outstanding loan balance immediately upon the transfer of any interest in the mortgaged property without the lender's written consent.

Key Term: Due-on-Sale Clause
A provision in a mortgage or deed of trust allowing the lender to demand immediate payment of the entire loan balance if the mortgaged property is transferred without the lender's consent.

Purpose and Effect

Risk Management: Lenders want to control who is the borrower and to reprice the loan if interest rates rise.
Acceleration: A due-on-sale clause does not itself make the grantee personally liable; it simply gives the lender a right to accelerate the debt against the existing borrower and to foreclose if the accelerated sum is not paid.

Critically:

If a buyer takes subject to the mortgage, the due-on-sale clause allows the lender to accelerate against the original mortgagor and foreclose, but does not create personal liability in the buyer.
If the buyer assumes the mortgage and the lender consents (or later agrees to the assumption), the lender may accelerate against both parties and may sue both for any deficiency.

Enforceability (Garn–St. Germain Act)

Under the federal Garn–St. Germain Depository Institutions Act, due-on-sale clauses are generally enforceable for most real-estate loans, preempting contrary state restrictions. There are narrow statutory exceptions where lenders may not enforce a due-on-sale clause, such as:

Certain transfers on death to a relative;
Transfers between spouses incident to divorce;
Certain transfers into an inter vivos trust where the borrower remains a beneficiary and continues to occupy the property.

On the MBE, unless a fact pattern clearly falls within a statutory exception, you should assume the due-on-sale clause is enforceable and gives the lender the option to accelerate upon transfer.

Worked Example 1.4

A corporate officer purchased land with a loan from Corporation, giving Corporation a recorded mortgage. The note contained a due-on-sale clause requiring, at Corporation’s option, payment of the full outstanding amount if the land was sold without Corporation’s written consent. After three years, the officer sold the land to Buyer without obtaining Corporation's consent. The deed recited that the land was conveyed “subject to the mortgage.” Neither the officer nor Buyer made any further payments. To avoid foreclosure, Corporation sues Buyer personally for the full outstanding balance, relying on the due-on-sale clause. Is Buyer liable?

Answer:
No. Buyer took the property subject to the mortgage and did not assume the note. The due-on-sale clause allows Corporation to accelerate the debt and foreclose if the property is transferred without consent, but it does not make a subject-to grantee personally liable on the note. Corporation’s remedy is to accelerate the debt against the officer and foreclose, not to sue Buyer personally.

Revision Tip

Assume due-on-sale clauses are enforceable on the MBE unless a specific exception (like those under Garn-St. Germain) is mentioned or clearly applicable. The main impact is that a transfer may trigger the lender's right to accelerate the debt; it does not, by itself, change who is personally liable.

Transfers by the Mortgagee (Assignment)

Although the focus of most exam questions is on transfers by the mortgagor (assumption vs. subject to), you should know the basics of mortgagee transfers.

A lender can transfer:

The note (the personal obligation), and
The mortgage (the security interest).

Key rules:

A valid transfer of the note generally carries the mortgage with it automatically.
Some jurisdictions treat a transfer of the mortgage without the note as a nullity, because the note is the principal evidence of the debt.

If the transferee of the note qualifies as a holder in due course under Article 3 of the UCC (properly negotiated note, taken for value, in good faith, without notice of defenses), the transferee may take free of many personal defenses that the mortgagor could have asserted against the original lender. However, the transfer does not alter whether a grantee took subject to or assumed the mortgage; the assignee simply steps into the original lender’s position.

Key Point Checklist

This article has covered the following key knowledge points:

A mortgage separates the personal obligation on the note from the security interest in the land.
When mortgaged property is transferred, the buyer either assumes the mortgage or takes subject to it.
Assumption: Grantee becomes primarily personally liable to the lender; original mortgagor becomes secondarily liable as a surety and can seek reimbursement from the grantee.
Subject To: Grantee has no personal liability; original mortgagor remains personally liable; property remains subject to foreclosure, and any deficiency judgment can be obtained only against the mortgagor.
Suretyship principles apply when the grantee assumes; unconsented, material modifications or impairments of security by the lender discharge the original mortgagor-surety.
A novation can substitute the assuming grantee as the sole obligor and release the original mortgagor from liability, but it requires the lender’s agreement.
Due-on-sale clauses are generally enforceable and allow the lender to accelerate the loan upon transfer but do not, by themselves, create personal liability in a subject-to grantee.
After foreclosure, the availability and target of a deficiency judgment depend on whether there was an assumption or a subject-to transfer.
Assignment of the note and mortgage by the mortgagee leaves all assumption and subject-to relationships intact; the assignee stands in the lender’s shoes.

Key Terms and Concepts

Mortgage
Mortgagor
Mortgagee
Assumption of Mortgage
Subject To Mortgage
Surety
Novation
Due-on-Sale Clause
Deficiency Judgment
Assignment of Mortgage

Mortgages/security devices - Assumption and transfer subject...