Subject To Financing Real Estate: How It Works

Published on August 1, 2023

Subject To Financing Real Estate: How It Works

One of the more curious effects of the COVID-19 pandemic is the hot real estate market we are experiencing these days. Interest rates in 2020 fell to historic lows, spurring great demand, which flipped the market over and created a seller's market with real estate prices climbing steeply every year.

With interest rates on the rise again, you may wonder if properties can still be acquired for relatively cheap similar to three years ago.

We have good news for you: it is entirely possible with subject to loans!

Subject to Financing: What Is It?

Subject to financing is a tool wherein a real estate investor takes over the seller's existing loan balance, or in some cases, pay it outright, in order to acquire the property at a favorable rate.

In subject to deals, the agreement is usually between the buyer and the seller only--with the mortgage company out of the equation. Both parties sign a contract spelling out the terms of the agreement.

The investor then makes payments on the current mortgage, with the same interest rate, but the loan remains under the seller's name. Depending on the contract terms, this arrangement usually gives the buyer ownership rights: they can move into the property, lease it out, or flip it for a tidy profit.

For the seller, passing on the loan balance to an investor can provide financial relief, especially if they are struggling with their monthly mortgage payments or if they are already at risk of foreclosure.

Subject to Financing: What Is It?

What are the Benefits of Buying a Subject-to Property?

Buying a home subject to can help you give you a solid start in real estate investing because of the following benefits:

You Save On Closing Costs

Closing costs are the fees paid at the end of securing a mortgage. The amount paid differs from case to case, and they can run anywhere from between 2% to 6% of the original loan. Sometimes they're negotiable, but not guaranteed.

With potential costs like appraisals, broker commissions, loan origination fees, and prepaid daily interest charges stacking up, it may work in your best interest to consider a subject to financing deal instead.

Since part of the original loan has already been paid, the buyer gains access to the property much faster than going through traditional financing with its credit checks and tons of paperwork.

You Take Over the Seller’s Existing Interest Rates

With the economy overheating nowadays, the Fed has stepped in by raising interest rates to keep inflation from going off the rails. This is a total 180 from three years ago, when the average interest rate plunged to historic lows of 3.1%.

While such rates are a thing of the past, that doesn't mean they can't be had nowadays. When you purchase subject to real estate, you essentially take over the seller's existing loan balance: terms and all.

The greatest financial perk? The favorable interest rates of the existing mortgage carries over to you!

Therefore, it's possible that you'd only be paying 3% interest rate, versus upwards of 5% for most conventional mortgages these days.

You Can Have Better Loan Terms Compared to a Traditional Loan

These loans are legally tied up with the mortgage lender, or other financial institutions subject to stricter policies and established corporate procedures.

In contrast, with subject to financing, the talks are only going to be between the you and the seller. The requirements are also typically more lenient than conventional loan providers. If they are a motivated seller looking to offload a trouble property fast, you can expect a swift closing.

You Can Have Better Loan Terms Compared to a Traditional Loan

Are there Risks in Subject To Financing?

For you to succeed in real estate investing, you'd have to be comfortable to take on risks. That's not to say you'll plow ahead blindly. It's important to first be aware of the risks before making use of subject to financing so that you can properly strategize, ensure profitability, and avoid losses.

Buyers' Risks

As a buyer taking advantage of this novel financing option, you expose yourself to the following risks:


Real property subject to existing financing is certainly an attractive prospect for a budding real estate investor.

However, before you jump in, make sure to thoroughly assess your financial situation and that your income is secure. If you can't afford the loan payments down the line, you risk a foreclosure, which can be a black mark on your credit history for up to 7 years.



If you slide on your payments, there's a chance that the seller will file a lawsuit for not keeping up with your legal agreement. This will reflect badly in future real estate endeavors. Consider this if you're aware that you might not be able to sustain a steady payment cycle.


Securing insurance on a subject to home can be tricky.

Reasons for refusal may include the following: location (i.e. flood-prone area), age of the property, the current condition of the property, the seller's credit score, and claims history.

Any house with multiple claims in the past will come off as high-risk to an insurer, due to the high probability of having claims in the future, and they may refuse to insure it.

Loss of the Property Due to Seller Filing for Bankruptcy

In dealing with subject to real estate, the mortgage company is usually out of the equation. And although it is now the buyer who has been faithfully making the payments, the property is still the seller's liability.

If the seller files for bankruptcy, this has the unfortunate consequence of the buyer losing the home.

Sellers' Risks

Existing Mortgage May Limit Other Loans

A home purchase is probably the largest purchase an individual makes in their lifetime. Since it involves a large sum of money, there are plenty of financing options to choose from.

Now, if the owner chooses to sell it to you later on in a subject to deal, the mortgage remains attached to their name, unless you pay in cash. This existing mortgage balance can make it difficult for the seller to secure a loan to another property.

Existing Mortgage May Limit Other Loans

Loss of Control

Perhaps the biggest risk to the seller is risking a potential loss of control over their mortgage. If you suddenly stop making payments, it is the seller who is on the hook for it, possibly tanking their credit.

How to Find Subject to Properties: A Quick Guide

An incredible real estate deal starts with finding the ideal subject to property.

Below are a couple of ways to locate them:

Internet Searches

Today's investors have the opportunity to find subject to properties at the convenience of their homes by browsing the internet. Social media has evolved from connecting long-lost friends to becoming a viable platform for business deals.

It's possible to gather leads from Facebook marketplace, for instance. What's more, you can connect with the seller directly since most people have their phone numbers or email addresses linked to their accounts.

White Pages/Online Directories

White Pages is a company that keeps a public record of several thousands of resources for public businesses and consumers. If you're concerned about the validity of any sellers in real estate investing, White Pages can run background checks, fraud screens, and identity verification.

Other valuable online resources include Yelp, Foursquare, Google Business Profile, and Better Business Bureau. Visit multiple sites and decide which one is best for you.


You can also ask the existing tenants. Who better knows the authenticity of a property manager than the people they rent to? Visit some neighborhoods and hold interviews with the tenants. They will be able to give you the most accurate information.

County clerks keep public records of businesses as well. In a pinch, scouring through them with the assistance of an attorney will provide an unbiased image of your potential seller.


What Are the Types of Subject to Mortgages?

There are three types of subject to mortgages depending on your budget and investing style:

Straight Subject-to, Cash-To Loan

When you pay the difference between the purchase price and the remaining balance from the mortgage, this is classified as a straight subject-to, cash loan.

For example, you found a property selling for $300,000, with an existing balance of $200,000, you only need to give the seller $100,000 in exchange for the property.

Straight Subject-to, Cash-To Loan

Straight Subject-to With Seller Carryback

The second type is a straight to seller carryback, additionally known as owner financing. The home owner also acts as the bank or lender. They can offer to add a second mortgage onto their property, or provide you with a lease option wherein you will be renting for the meantime, but with the right to purchase the property later.

This is incentive for the buyer because it supplies financing, and entices them to sign their real estate contract as opposed to others on the buyer's market.

Wrap-Around Subject-to

This is a particularly attractive option for sellers who have a very low interest rate on their mortgages. Instead of the buyer paying for the existing mortgage outright, you can get one that 'wraps around'.

To illustrate, say an existing mortgage has an interest rate of 3%. The seller then charges you 4.5%, which is still lower than the prevailing market rates of above 6%, enabling them to make money and making the deal attractive to you.

Tips and Things to Consider Regarding Subject To Financing

Navigating the world of real estate can seem complicated without prior knowledge. These handy tips from real estate experts and investors will steer you right.

Make Sure You Look Out for ‘Due on Sale Clause'

When investing in a property, oftentimes there is a provision written in the mortgage called a Due on Sale Clause. This is an agreement that the original lien holder can demand you pay back the loan entirely, regardless of the original term, if the property is sold off.

Make Sure You Look Out for ‘Due on Sale Clause'

Offer the Seller Cash

Cash-to-loan subjects are the easiest way to carry out subject to financing deals. The property owner uses the money to pay off whatever balance is left and gets to pocket the difference.

A cash sale also eliminates the risk of losing the property if the owner files for bankruptcy, since you now own it free and clear. In line with this, it can be worth it to have a title company run a search to ensure that the title is cloud-free.

Treat the Loan as if You Have Personally Signed the Mortgage Payments

There is no legal obligation tied to you with a subject to financing. Often, a lender does not allow someone else to make financial commitments on their client's behalf.

Even so, think of the monthly payments as if they were under your name personally. Though the liability remains with the original borrower, you should be aware of the risks and what you're signing up for.

Treat the Loan as if You Have Personally Signed the Mortgage Payments

Research Loan Terminology

In real estate, there are several terms hidden within the fine print that the average buyer may not be aware of. Watch out for things such as a fixed versus adjustable interest rate, property tax, and prepayment penalties.

A prepay penalty is a kind of fee that some, but not all, lenders charge if you pay off your existing mortgage early. Sellers will not always brief you on these things, so it may be a good idea to meet with a real estate attorney.

Consult With a Real Estate Attorney

To make sure all your bases are covered in a real estate deal, invest in an attorney. They can help you navigate a land contract, interest rates, and the due on sale clause, just in case.

Real estate attorneys also are authorized to look over any legal documentation. If necessary, they will provide the buyer with legal advice and explain real estate contracts.

Subject-to vs. Loan Assumption

Be aware of this term. Subject to means that the buyer has no personal liability for repaying the loan on a mortgage agreement. The buyer can just stop paying the loan and leave the seller in the lurch.

Since the lender is not aware of the agreement, the seller still remains financially responsible, carrying all the risk. In case of a foreclosure, this will go on the seller's record.

A mortgage company often uses special verbiage to ensure this doesn't happen, and if it does, they can invoke the due on sale clause.

With a loan assumption, the lender does have knowledge and gives approval. The buyer pays on the existing mortgage and controls the real estate property. Banks will usually charge a fee for processing, but it's much less than a conventional real estate fee.

Making Money With Subject to Financing Deals

The ultimate goal in real estate deals is to make money.

Once your subject to financing is secure, one option is to rent out the property. Rental income can be higher than your required monthly payment amount, resulting in immediate profit and a steady cash flow.

Another option is to sell the property, once all fees are paid. As the real estate investor, you hold the title, and can do what you want with it. Consider doing some basic yardwork and freshening up the façade before flipping it for a profit.

Making Money With Subject to Financing Deals

Frequently Asked Questions: Subject to Financing

Is It Legal?

The short answer is yes, it is legal.

However, depending on where you live, there may be specific conditions respective to each state that must be included in the contract. Additionally, each state will have different laws in how they handle these agreements, which is yet another reason why it's a good idea to hire a lawyer.

How does a Subject-to Mortgage benefit the seller?

While buying a home subject to is an attractive prospect for the buyer, you might wonder if it's as attractive for the seller as well.

For sellers in financial distress, having someone else take over the financing can provide much needed relief by helping them avoid foreclosure and tanking their credit score. The sale also closes much faster as opposed to a traditional sale, saving both parties plenty of time.

What is the difference between subject-to and seller financing?

With seller financing, the original owner acts as the bank where you make a monthly payment until you completely pay off the property. Since the payment term is typically stretched out, the seller can charge interest and make more money compared to selling outright on the open market.

On the other hand, when buying a property subject to financing, you make monthly payments directly to the lender and not the owner.

Key Takeaways: Investing in Subject to Properties

Where you're a seasoned real estate investor or an aspiring first time homeowner, here are some key points to remember when investing in subject to real estate:

  • Research the potential investment property thoroughly. You can do this by running a rental market analysis, or interviewing tenants already renting from the owner.
  • Read up on subject 2 financing. Make sure that you know exactly what you're getting into and talk to real estate investors to gain a better understanding before jumping in to your first subject to deal.

And the very first step in your quest for that awesome subject to offer?

Finding motivated sellers!

Here at Property Leads, providing high-quality leads are our specialty! Homeowners looking for a solution to their real estate woes come directly to us, and we immediately connect them to you, resulting in winning deals for everyone involved.

If you're interested, fill in our form below to get our highest converting leads delivered straight to your inbox!

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