FAQ Sub2

Subject-To FAQ

What does “Subject To” mean in real estate?

“Subject To” means taking ownership of a property without formally assuming the existing mortgage loan. The loan remains in the original seller’s name and on their credit report. You take title to the property while the seller remains responsible for the debt.

Why would a seller agree to a “Subject To” deal?

Sellers typically agree to “Subject To” deals when they’re highly motivated to get rid of a property, often facing foreclosure or financial distress. They may be behind on mortgage payments, have damaged credit, or simply want to walk away. By transferring ownership, they hope to avoid further damage to their credit score.

Are there risks associated with buying “Subject To”?

The primary risk is the due-on-sale clause present in most mortgages. This clause allows the lender to demand full payment of the loan if the property changes ownership without their consent. While lenders rarely enforce this clause when payments are current, it remains a possibility.

How can I minimize the risk of the lender enforcing the due-on-sale clause?

While you cannot eliminate the risk entirely, several strategies can help:

• Make timely mortgage payments: Lenders are less likely to intervene when payments are consistently on time.
• Don’t alert the lender: Avoid triggering the due-on-sale clause by keeping insurance and property taxes in the seller’s name.
• Use a land trust: Placing the property in a land trust can obscure the ownership transfer, potentially delaying the lender’s discovery.
• Consider short-term ownership: If you plan to resell the property quickly, the due-on-sale clause becomes less of a concern.

What are the advantages of buying “Subject To”?

• No qualifying: You don’t need to meet lender requirements for a new mortgage, making it accessible for buyers with limited credit or funds.
• Lower down payment: “Subject To” transactions often require minimal down payments, freeing up capital for other investments.
• Faster closing: Bypassing traditional financing processes leads to quicker closings and less paperwork.
• Multiple exit strategies: You can hold the property as a rental, fix and flip, or even sell with seller financing.

What documents are involved in a “Subject To” deal?

Key documents include:

• Purchase and Sale Agreement: Outlines the terms of the transaction, including the “Subject To” financing.
• Seller’s Due-on-Sale Acknowledgment: Confirms the seller’s understanding of the due-on-sale clause and their agreement to the transfer.
• Quit Claim Deed to Trustee: Transfers ownership to a land trust for asset protection and potential obfuscation of the transaction.
• Authorization to Release Mortgage Information and Limited Power of Attorney: Grants you access to mortgage details and allows you to act on behalf of the seller.

How do I handle insurance and escrow accounts in a “Subject To” transaction?

• Insurance: Add your trustee as an additionally insured party to ensure coverage in case of a claim.
• Escrow Account: Obtain a letter from the seller instructing the lender to credit any remaining escrow balance to the loan upon payoff.

What happens if the mortgage company calls the loan due?

While unlikely, if the lender discovers the transfer and enforces the due-on-sale clause, you have several options:

• Negotiate with the lender: Explain your situation and attempt to reach a payment arrangement.
• Refinance the loan: Secure a new mortgage in your name, if possible.
• Sell the property: Liquidate the asset to avoid foreclosure.