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What Is A Subject-To In Real Estate?

November 16, 20236 min read

Subject-To Purchase

"Subject-To" is a way of purchasing real estate where the buyer takes title to the property, but the existing loan stays in the name of the seller. In other words, "Subject-To" the existing financing. The buyer now controls the property and makes the mortgage payments on the seller's existing mortgage.

Why would any seller do this?

  1. In low equity situations- you are able to walk away without needing to bring money to the closing table or do a short sale. 

  2. You can walk away with the same or sometimes even more money in your pocket than a traditional sale. As mentioned above, depending on your mortgage balance, you may have little to no equity after closing costs and commissions. With Subject-To, we can sometimes pay even more since we are buying based on the cash flow the property produces as a rental and not based on the property's retail value.

  3. You are able to move on from the property. You no longer own the property and therefore you are no longer responsible for expenses such as repairs, maintenance, utilities, taxes, insurance, HOA etc.

  4. Your credit improves with on-time payments to the mortgage.

 

Here are some FAQ’s in regards to “Subject-To” Transactions:

 

  1. Is this legal?

  2. How will I know the mortgage payment will get paid on time?

    • We set up a third-party servicing company to withdraw money from our account and make direct payments to the mortgage. Setting up a third party servicer also shows proof that payments are being made by the buyer.

  3. What happens if you miss a payment?

    • We would use a mortgage which is a lien to protect the seller from default, similar to what a bank does. The seller in this situation would inherit the property back and benefit from any and all loan pay down payments, improvements made to the property, and appreciation that the property has seen. The seller could then sell the property again for even more money if they didn’t want to keep it. Sellers who have done this have often mentioned to us that they hope we miss a payment.

  4. Who is responsible if there are repairs or maintenance needed on the property?

    • The seller would not be responsible for any repairs or maintenance on the property after the deed is transferred. The person responsible for any repairs or maintenance would be whoever is on the deed of the property. Since the seller’s name would only remain on the mortgage and the deed would change into the buyer’s name, then the buyer would be responsible for all of the repairs and maintenance.

  5. What happens if the house gets trashed and then you default and I inherit the property back?

    • We would never let that happen for a few reasons. Firstly, we always have property insurance to protect from these types of situations. We can’t even bypass not having insurance because of the mortgage requirements, so insurance will always be active. If the property ever did get trashed, we would just work with our insurance company to bring the property back up to its previous condition. Secondly, we would never let that happen because we already have spent a lot of money just to purchase the property. We would lose all the cash that we paid to the seller, the closing costs, the repairs and upgrades that we made to the property, and all of the payments towards the principal balance. Quite frankly, this would be financially irresponsible on our part and we probably would have been out of business a long time ago if this ever happened.

  6. Won’t this affect my Debt-To-Income to buy another property?

    • For Conventional and FHA loans, after 1 year of on-time payments, 100% of the DTI should be removed from the seller’s name. All you will need to do is show your lender that on-time payments are being made by us for the past year. This is why we always use a servicing company. If a house needs to be purchased within the 12-month period, then I suggest you work with our lender who is familiar with these arrangement so he can wipe out a huge portion, if not all, of the monthly payments from the DTI.

    • If you have a VA loan, the amount you can purchase on your next home would depend on how much entitlement you have remaining. If you didn’t have enough entitlement for your next property, then you can use your proceeds from the “Subject-To” sale towards the down payment needed for your next home for a conventional loan.

  7. How does “Subject-To” affect my credit?

    • Since the loan is left in the seller's name, when the on-time payments are made, the seller’s credit score is beneficially affected. The on-time payments to the lender gets reported back to the credit bureau and can significantly help someone who is looking to improve their credit score and can save the seller more money down the road to get their credit repaired

  8. How long do you plan on keeping the mortgage in the seller’s name?

    • The short answer is forever. What I mean by forever is that we always tell sellers and agents to plan on keeping your name on the mortgage until the mortgage balance is paid off. However, I can tell you that my partners and I on average keep a property for about 7 years. The average homeowner stays in a house for about 7 years and it’s no different for investors. But, if interest rates do come down and it makes financial sense to refinance, then it’s likely we would pull the trigger even sooner.

  9. What happens if the Due-On-Sale Clause is called?

    • This rarely happens, but if the bank sees the deed has been transferred, they could request the remaining loan balance be paid in one lump sum because they believe the property has been sold (hence the name due on sale). We could do any one of the following:

      1. We have spoken to lenders before to describe the situation and they have rescinded their request because they ultimately care about their notes performing.

      2. We could also refinance or sell the property at that point to pay the bank back the mortgage balance in which the mortgage in the seller’s name would be paid off.


To Summarize

As far as what an offer might look like on a numbers aspect, it would entirely depend on the mortgage information since we will be taking over the debt.

I know this is a lot of information to digest. I recommend that you give this some thought and if you feel like you’d want to explore this as a plan B type option then feel free to reach out

Please let me know if you have any questions or if you’d like to jump on a call to discuss further too.


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