What is Subject-To?
In a “subject-to” transaction, the buyer will take over the subject property for the assumption of the exact amount of the remaining balance of the existing mortgage. This is not a traditional “assumption”. The seller will not receive any future monthly payments from the purchase, unless equity payments. The buyer’s payments will be directed to the original lender, not the seller. The buyer is taking over or assuming all of the terms and conditions of the existing note/mortgage. This is also called a mirror wrap or wrap-around mortgage.
Benefits of Selling Subject-To:
- Receive More Cash at Closing – Sellers can walk away with more money in their pocket versus a traditional sale, due to the fact we cover agent commissions and closing costs. With subject-to or seller finance, we can occasionally pay more than the asking price since we are buying it for cash flow of a rental, appreciation, and depreciation.
- Credit – The seller’s credit improves with on-time monthly payments from the buyer. Paid through a third-party servicing company.
- Seller Can Move On – The seller no longer owns the property, and therefore is no longer responsible for expenses such as repairs, maintenance, utilities, taxes, insurance, HOA, etc.
Is This Legal?
YES, HUD statements, distributed at the end of a real estate transaction, show an overview of how all money was distributed; there is language and placeholders in there for loans being taken over “Subject-To”.
For actual proof of this, please see the following link and read lines 203 and 503: Fill-able HUD-1.
Common Questions
How will I know the mortgage payment will get paid on time? We hire a third-party servicing company to withdraw money from our account and make direct payments toward the loan. Setting up a third-party servicer also shows proof that payments are being made by the buyer, which can erase Debt-to-income for the seller. This is the same as a seller moving to a new home and renting their previous home.
What happens if you miss a payment? In the highly unlikely event that we are abducted by aliens and unable to make payments, the property would be transferred back to the seller within 30 days through the Deed of Trust. The Deed of Trust states that if the buyer misses a single payment, the property will be deeded back to the original seller. This is a document that is recorded with the county recording office, so both parties are protected. This means that the seller would keep all the funds we’ve paid so far and regain possession of the house. (down-payment, agent commission, closing costs, all monthly payments, and arrears if any) This would be a horrible situation from the perspective of an investor, losing their entire investment.
What happens if the Due-On-Sale Clause is called? This is very unlikely, but can happen. There are many ways to overcome this. We have spoken to lenders before to describe the situation and they have rescinded their request because they ultimately care about their notes performing. We can refinance or sell the property if needed. We can also deed the house back to the seller and buy the house on a lease option. Then, we would become the tenant and we have the option to buy the house at any point in the future. We can also revert to a land contract. There are so many options to overcome this and these will eliminate the due-on-sale clause objections.
Who is responsible for repairs or maintenance on the property? The seller is not responsible for any repairs or maintenance after the deed for the property is transferred. Since the buyer is now the deed holder, they become responsible for anything pertaining to the property.
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