Subject to - Real Property Hero

“Subject To” also known as “Sub To” is a term used in real estate transactions where a buyer purchases a property subject to the existing mortgage. This is a non-qualified assumption of the existing loan(s). Sub to is totally legal, and much more common than people know! Subject to is our favorite creative financing method. Banks are happy to get on time payments; and buyers and sellers are happy they don’t have to involve the banks with the hassles and costs of any new bank loans! Sub to is also one of the fastest ways to close with not all the hassles and costs that come with banks.

When a property is purchased “subject to” existing loans, it means that the buyer acquires the property while leaving the seller’s mortgage (note) in place. A Loan Assumption Addendum is used along with other Addendums like a Seller Finance Addendum. While a mortgage wrap is a financing arrangement where a buyer creates a new mortgage using seller financing by assuming the seller’s existing mortgage, aka subject to.

Here’s a brief summary of how a subject to purchase typically works:

Agreement: The buyer and seller agree to a purchase price and terms for the property, including the decision to proceed with a subject to transaction. Both parties sign a purchase agreement or contract outlining the details of the sale with a subject to addendum.
Mortgage Transfer: Instead of paying off the seller’s existing mortgage, the buyer takes over the responsibility for making mortgage payments on behalf of the seller. The buyer does not assume the liability for the loan formally, but rather takes control of the property and continues making payments to the lender. We require subject to buyers to use a third-party payment processing service for handling payments which can offer several advantages explained in the next section below.
Due Diligence: The buyer conducts thorough due diligence to ensure they understand the terms and conditions of the existing loan, including interest rate, repayment schedule, and any associated fees or penalties. They will review the property’s title to confirm there are no liens or encumbrances.
Closing and Transfer: At the closing, the buyer and seller complete the necessary paperwork to transfer ownership of the property. The buyer typically pays the agreed-upon purchase price to the seller, and the title is transferred to the buyer.
Ongoing Mortgage Payments: After the purchase, the buyer assumes responsibility for making timely mortgage payments to the lender, ensuring that the loan remains in good standing. The seller’s name may still be on the mortgage, but the buyer is responsible for making the payments.

Third-party Payment Processor (service)

When conducting a subject-to sale, which involves transferring a property subject to an existing mortgage, using a third-party payment processor, aka a third party service, for handling payments is a MUST and can offer several advantages. These include:

Transparency & Trust: A third-party payment service ensures that both the buyer and seller have access to clear records of payments made. This can alleviate trust issues, as neither party has complete control over the financial process, minimizing potential disputes over payments.
Ensures Mortgage Payments: The third party can make sure that the mortgage payments are made directly to the lender. This protects both the seller (who remains legally liable for the mortgage) and the buyer (who might be at risk of losing the property if payments are missed).
Avoids Legal Complications: If the buyer makes payments directly to the seller, there is a risk that the seller may not use the funds to pay the mortgage. This can lead to foreclosure, despite the buyer’s good faith payments. A third-party escrow service ensures that the lender is paid first, avoiding this risk.
Loan Due on Sale Clause Protection: Most mortgages contain a due-on-sale clause, which allows the lender to demand full repayment if the property is sold. A third-party service can be used to manage payments discreetly, potentially reducing the likelihood of alerting the lender and triggering this clause.
Simplifies the Process: A third-party payment service can automate the monthly payment schedule and ensure consistent, timely payments. This reduces the burden on both the buyer and seller to manage these transactions manually.
Reduces Disputes: By using a neutral party to handle payments, misunderstandings or accusations of non-payment are less likely to arise, as both parties have access to verifiable payment records.
Tax and Accounting Benefits: Using a third-party service can simplify record-keeping for tax purposes. The service will likely provide detailed reports of payments, which can be helpful for both parties during tax filings.
Protects Credit: For the seller, using a third party ensures that the mortgage is being paid, which protects their credit score. Missed payments could harm the seller’s credit even though they no longer live in or own the property.

Overall, using a third party to handle payments in a subject-to transaction provides peace of mind and legal protection for both the buyer and the seller. We have a few options for third party payment processors that have been doing this for decades.

Here are the advantages and disadvantages of purchasing a property “subject to” the existing mortgage:

Advantages:

No Need for New Financing: When purchasing a property “subject to,” the buyer does not need to obtain a new mortgage or financing. This can be beneficial if the buyer does not qualify for a traditional mortgage or prefers not to go through the loan application process. Banks are a hassle and increase costs in a transaction costing the buyer more money which can in turn cost the seller. Sellers can also use their existing mortgage as a selling point for their home, especially if they have good mortgage terms like a lower interest rate and years of mortgage payments that have already been paid.
If Seller is slightly underwater or owes around the home’s value. Situations where the seller will have to come to the closing table with money is not a situation a seller wants to be in. Some times there is no room for all the extra costs in the transaction when going the traditional sale route; and obtaining a new mortgage on the property comes with all sorts of expenses and red tape. Often offering subject to terms to buyers can get you more for the property than you may have been able to get on the retail market as a traditional sale on the MLS.
Favorable Mortgage Terms: By assuming the existing mortgage, the buyer may benefit from more favorable terms, such as a lower interest rate, longer repayment period, or a fixed rate compared to what they could secure with a new mortgage. Currently with high mortgage interest rates Sub to is very popular.
Avoiding Closing Costs: Banks will not be a part of this closing! Since the buyer is not obtaining new financing, they will be able to avoid some of the closing costs associated with obtaining a new mortgage. Also mortgages often go wrong even at the last minute when you’ve already planned on being closed. Mortgage red tape items like making appraisal, completing property and borrower underwriting and all the stipulations that come with completing a new mortgage.
Immediate Ownership: The buyer gains immediate ownership and possession of the property upon the completion of the purchase transaction through a real estate attorney or a title company, without having to wait for mortgage approval or loan processing. Sub to sales can close fast with less hassles!
Improve credit score and financial opportunities of the seller:
- Timely Mortgage Payments: If the buyer continues making timely mortgage payments on behalf of the seller, it can help maintain a positive payment history. Consistent, on-time payments contribute to building a good credit history and can potentially improve the seller’s credit score over time.
- Reduced Debt-to-Income Ratio: When the buyer takes over the existing mortgage, the seller’s outstanding loan balance is effectively transferred to the buyer. As a result, the seller’s outstanding debt is reduced, which can positively affect their debt-to-income ratio. A lower debt-to-income ratio is generally considered favorable in lending evaluations.
- Potential for New Credit Opportunities: By relieving the seller of the mortgage payment obligation, the seller may have improved cash flow and more financial flexibility. This enhanced financial situation can potentially open up opportunities for the seller to take on new credit, if needed, and responsibly manage additional lines of credit or loans.

Disadvantages:

No Mortgage changes: Since the mortgage remains in the seller’s name, the buyer has no control over renegotiating the terms of the existing mortgage. This means that the buyer will not be able use the existing mortgage to pull out any equity. The buyer at that point would need to refinance the home into their own name and pull out equity then. Buyer’s refinance the property into their name as soon as it makes sense to do so or by the deadline the buyer and seller may have agreed to at the time of the purchase. The buyer may also simply sell the home or pay off the mortgage themselves.
Due-on-Sale Clause: Most mortgages contain a due-on-sale clause, which gives the lender the right to accelerate the loan and demand full payment if the property ownership changes. While the due-on-sale clause is rarely enforced, there is a risk that the lender may exercise this option, requiring the buyer to pay off the mortgage or refinance the mortgage in their name(most common) and worse case if left unresolved after due in sale clause notice, face foreclosure. While subject-to deals technically violate the clause, a third-party payment processor service can be used to manage payments discreetly, greatly reducing the likelihood of alerting the lender and triggering this clause. All and all, banks just want their payments and all that interest they make off the payments; they’re not typically concerned with who is making the payments, just as long as the payments are being made.
Seller’s Credit and Liabilities: The seller remains legally liable for the mortgage even after the property is sold “subject to.” If the buyer fails to make the mortgage payments, it could negatively affect their credit, and it may have consequences for the buyer if the lender pursues remedies against the seller. Typically buyer’s do not have issues because a subject to mortgage terms are often better than terms if they got a new mortgage. This is why we require in contract that the buyer use a Third-party Payment Processor (service) with the seller as an immediate notification if a payment is missed.
Limited Legal Protection: Purchasing a property “subject to” may offer limited legal protection for the buyer since the mortgage is not in the buyer’s name. It’s important for buyer to have the correct home insurance, these are insurance companies that deal with subject to situations and keep every one covered. We give you those insurance company names that are regulars with this. It’s advised if you don’t understand this to consult with a real estate attorney and/or financial advisor to fully understand the legal and financial implications of purchasing or selling a property “subject to” and to assess whether it is a suitable option based on your specific circumstances.

Subject-to real estate deals have been around for many decades, dating back to at least the mid-20th century, though the practice likely emerged even earlier. The concept became more prominent after the creation of modern mortgages, as buyers and sellers sought creative ways to transfer property without obtaining and paying off mortgages.

These deals were particularly popular during periods of high interest rates, such as the 1970s and 1980s, when buyers wanted to take advantage of existing lower-rate mortgages rather than securing new, more expensive financing. Subject-to transactions are still used as a creative financing tool in real estate investing and are once again picking up due to stressed mortgages and high interest rates.

A subject-to sale creates a win-win situation for both buyers and sellers

For buyers, it allows them to acquire property without needing to qualify for a new mortgage or pay a large down payment. They can take over the existing mortgage’s favorable terms, often with lower interest rates.
For sellers, it offers a quick way to offload a burdensome mortgage and sell a property. Seller’s move on without needing to pay off the loan immediately, quicker real estate closings, and a situation often leading to a better price one may not have gotten with out offering good creative financing terms.

Both parties benefit: the buyer gains homeownership with in-place financing, and the seller avoids financial strain. Talk with Mike about buying or selling with creative financing, Subject To the existing mortgage.