5 Tips for Subject-To Loans from Real Estate Experts
Have questions about buying properties subject to a mortgage? Of course you do — it’s an unusual maneuver.
Try out these seven tips from professional real estate investors to make your first subject-to financing deal silky smooth.
1. Offer The Seller Cash Too
The average home seller just wants to sell their house for top dollar, pay off their mortgage, pocket the rest, and never look back. “For a seller to consider selling their home subject to the mortgage, they need a good reason. That could be trouble with making their mortgage payments, keeping up with necessary repairs, or other life stressors.
“It helps to present a subject-to offer in tandem with some other type of offer, such as a cash offer. This changes the dynamic from a ‘take it or leave it’ offer to them being able to choose which one works best for them.
“Make sure you understand how the seller’s prospects for future loans could be affected if you buy their house subject to a mortgage and they leave their old loan open. At worst, a future lender will view it as a rental property with you as the tenant and give them a 75% credit on the payment on their debt-to-income ratio.”
—Jordan Fulmer
Real Estate Investor and Founder of Momentum Property Solution
2. Watch out for “Due-On-Sale” Clauses
“Most banks include something called a due-on-sale clause in their mortgages. This means that when real property is sold or changes title, the total outstanding balance on the mortgage is immediately due (hence the name). Since the property is changing title during a subject-to financing deal, this could trigger an alert at the bank and make them come after the seller for the money.
“That said, some older/smaller banks don’t have these systems in place and, as long as they’re still receiving the monthly payments, never find out that a property has changed title. I’ve heard of many cases where this happens. Nevertheless, this is something to watch out for.
“Make sure a real estate attorney is involved. In most subject-to financing deals, the buyer has no legal obligation to pay the mortgage even though they now have title to the property. This is because the loan is still in the seller’s name. Hence, the buyer could technically only pay the property tax and stop paying the mortgage. Due to this legal murkiness, make sure that you have a real estate attorney advise you on subject-to financing deals so that you’re legally and financially covered for all contingencies.”
A title company can help you cover your legal bases here as well, from preparing a legal contract between you and the seller to double checking that property taxes are up to date.
—Marina Vaamonde
Owner and founder of HouseCashin
3. Treat the Loan as if You Have Personally Signed The Mortgage
“The simplest, quickest, cheapest, and least complicated way to purchase property is subject to the seller’s mortgage. However, contrary to popular belief, it is not without risk.
“One danger is that the seller declares bankruptcy. In this case, you own the house and its equity, but the original borrower still owns the financial commitments to the subject-to loan. The loan might be included in the bankruptcy, and the original lien holder could foreclose on the property.
“Accepting someone’s loan and agreeing to make payments on it is a major responsibility; anyone using this form of purchase should treat the loan as if he had personally signed the mortgage. Some approaches recommend putting the property in a trust and selling the trust’s beneficial interest to conceal ownership. This is an attempt to avoid the due-on-sale clause being triggered (which is found in most conventional mortgages).
“Subject-to is an excellent method to start building an income-producing real estate portfolio. Because the loans are not in your name and you never have to qualify, there are no restrictions on how many you can buy. Buying real estate subject-to also makes a fantastic tool for more seasoned investors, as it is one of the most efficient methods to generate wealth quickly.”
—Danny Marshall
Mortgage Broker Educator at Mortgage Rate Guru