There are various strategies that cater to the diverse needs of buyers and sellers in real estate. One of which is the “subject-to” mortgage.
At its core, this method involves buying a property "subject to" its existing financing. But what does this really entail? How can both parties benefit, and what risks should they be wary of?
This blog goes into the ins and outs of subject-to mortgages, looking into how it works exactly, its advantages and challenges, as well as how you can find subject to deals in your target areas.
A "Subject To Mortgage" is a real estate term referring to the acquisition of a property where the buyer takes over the payments of the seller's existing mortgage or current mortgage on the property but without formally assuming the loan.
In essence, a subject to mortgage is a mortgage that remains in the seller's name, but the buyer gets the deed and takes responsibility for making the monthly mortgage payments. The loan is not in your name and you never have to apply for financing. This arrangement where the buyer becomes legally responsible for the mortgage is often appealing to sellers facing foreclosure or those who need to sell quickly.
For buyers, this offers a way to purchase property without obtaining a new mortgage, which can be especially useful if they have credit challenges. They never have to qualify for a mortgage loan if they are interested in purchasing a property because of this strategy.
However, there are risks associated with buying a home when you use a subject to mortgage. Many have a "due on sale" clause in the mortgage that gives the lender the right to demand full repayment or right to call repayment upon the sale or transfer of the property. If the lender enforces this clause, the buyer could be required to pay off the mortgage in full or risk foreclosure since they are liable for the debt.
Additionally, if the buyer fails to make payments or they get behind on payments, it could negatively impact the seller's credit, as the mortgage is still in the seller's name even though the buyer already took ownership of the property. We will discuss more on this in a separate section of this blog.
"Subject-To" and "Loan Assumption" are both strategies in real estate that involve taking over the payments of an existing mortgage, but they come with different procedures and implications.
The concept of a "Subject-To" transaction in real estate, as detailed in the previous section, is when a buyer acquires a property "subject to" the existing financing.
In this scenario, the buyer essentially takes over the property and agrees to continue making the mortgage payments, but the original mortgage remains unchanged and the existing loan stays in the seller's name. The existing mortgage carries an interest rate similar to the previous one.
On the other hand, a loan assumption is a more formal process where a buyer officially takes over, or "assumes" the seller's existing mortgage. This transfer means the mortgage is now under the buyer's name, and they become the official party who needs to pay the mortgage religiously.
When assuming the mortgage, the lender involved typically needs to give their approval. This often requires the buyer to undergo a vetting process, much like they would if they were applying for a new mortgage.
When you try to assume a mortgage and it is approved, the liability shifts from the seller to the buyer, so if there are missed mortgage payments, the property could still be foreclosed but the previous owner won't be affected.
As is with any real estate strategy, a subject to has its own benefits and risks. Let’s explore them in this section.
One of the significant benefits of a subject-to deal is the potential for a buyer to acquire a property without the need for a substantial down payment. Traditional financing or traditional mortgage acquisitions often demand hefty initial payments when a homeowner tries to sell the home, which can be a barrier for many buyers.
When purchasing a property subject-to, especially if obtained below market value, buyers can immediately tap into the equity of the home which is the primary reason for buying subject to for many investors.
If the property is rented out, this can also mean instant positive cash flow from the rental income after covering the existing mortgage payments.
A subject-to acquisition bypasses traditional lending checks when you apply for a traditional loan. This is advantageous for individuals with poor credit or no credit history, as they might struggle to get approved for a conventional mortgage.
In other words, they get to buy a house or land contract without having to qualify from a mortgage just like the original borrower. This is a great way to build a portfolio especially for beginners.
Since the buyer is taking over an existing loan without any other steps, there's no waiting period for mortgage application processes or lender approvals, which can often be time-consuming.
By eliminating the need for brokers or certain lending institutions, buyers can save on associated fees and closing costs. Additionally, the closing process can be sped up without the complications of conventional loans.
If the seller's original mortgage has a favorable interest rate, especially in comparison to current market rates, the buyer can benefit by continuing payments under those terms. You won't have a separate interest rate.
Once a subject-to deal is closed, it can be difficult, if not impossible, to reverse. This can be problematic if the buyer later discovers undisclosed issues with the property or the terms of the original mortgage.
While the mortgage remains in the seller's name, the property's deed is transferred to the buyer. This means the buyer will need to acquire a new insurance policy, which can be a hassle and may come with increased rates.
A significant risk with subject-to transactions is the "due on sale" clause found in many mortgage contracts. If the lender becomes aware of the property's change in ownership, they might demand the unpaid balance immediately through an acceleration clause
If the buyers agree to make mortgage payments and default, it impacts the seller's credit score since the mortgage is in their name. However, the property is in the buyer's name, meaning they risk foreclosure if the lender calls the loan due and they cannot pay. Don't fret, though, as there are ways to avoid foreclosure and a responsible seller would look into this before selling the home to you.
If the seller enters into bankruptcy after the subject-to transaction, there might be claims against the property's equity by the seller's creditors. This can jeopardize the buyer's stake in the property and may lead to financial complications or litigation. In this case, a real estate attorney is needed.
Depending on the circumstances and negotiation dynamics between the buyer and seller, various types of subject-to arrangements can be established. Check out the following ways to buy a home subject to an existing mortgage.
This is the most straightforward type of subject 2 transaction when you buy a home. In a Straight Subject-To, Cash-To Loan deal, the buyer simply takes over the existing seller's mortgage payments of the seller. The buyer provides cash to the seller for any equity they have in the property above and beyond the existing loan. The seller takes home the difference between the purchase price and the existing mortgage balance.
For instance, if a property is worth $200,000 and the seller owes $150,000, the buyer might give $20,000 cash to the seller and take over the payments on the remaining $150,000.
In this arrangement, not only does the buyer take over the existing mortgage, but the seller also finances a portion of the buyer's purchase. This is typically done in situations where the seller's existing loan balance or mortgage balance is significantly less than the property's value.
Using the previous example, if the property is worth $200,000 and the seller only owes $100,000, the buyer might take over the $100,000 mortgage and then provide a promissory note to the seller for an additional $50,000.
This means the sellers carry the remaining balance or carry back a note, essentially acting as a lender for that portion of the purchase. This financing option can be advantageous for buyers who don't have all the cash upfront or cannot secure additional financing for the full purchase price.
This is a more complex form of Subject-To. In a wrap-around deal, the buyer provides a promissory note to the seller for the entire purchase amount, even though a portion of that amount is still owed by the seller to their original lender. It allows the seller an override of interest in the form of a second mortgage.
Essentially, the new loan "wraps around" the old one. As the buyer or real estate investor makes monthly payment based on this new, larger loan, the seller continues making the payments on the original loan balance or smaller loan from the previous borrower or homeowner.
The difference in payment amounts between the two loans becomes profit for the seller. However, the buyer holds the title to the property.
Finding "Subject-To" properties requires a keen eye for potential opportunities where sellers might be motivated to use such an arrangement. Here are some of the best sources of sub to deals:
By searching county records, one can find properties that are behind on property taxes, recently inherited, or in pre-foreclosure. Such situations might make the owners more receptive to a Subject-To agreement, as it can offer a quick solution to their financial woes.
These marketplaces frequently cater to distressed sellers or those seeking non-traditional sale methods, aligning with the typical profile of a sub to seller.
Instead of manually hunting for leads, these platforms aggregate opportunities, which can save significant time and effort.
When a property listing expires on the Multiple Listing Service (MLS) without a sale, it can indicate a frustrated seller. These sellers might be open to alternative selling strategies, including Subject-To, especially if they've struggled to sell traditionally.
A property owner who choose the FSBO route are already looking to bypass traditional real estate agents, indicating they might be more open to unconventional sale methods like subject to.
As we've explored in this blog, when executed wisely and ethically, subject-to can be a win-win for all parties involved. By allowing buyers to take over existing financing, it offers a unique way to own a property, especially for those who want to avoid the challenges of getting a traditional mortgage.
Now that you’re already equipped with knowledge about subject to mortgage, let us help you land your first deal. Here at Property Leads, we offer highly motivated seller leads not listed on the real estate market. These leads may be willing to enter a subject-to agreement!
Fill out the form below to get started!
30 N Gould St Ste N
Sheridan, WY 82801
(207) 309-3949
sales@propertyleads.com
