Subject-To Real Estate Investing FAQ

1. What does buying a property “Subject To” mean?

Buying a property “Subject To” the existing mortgage means taking ownership of the property without officially assuming the existing loan in your name. The loan remains in the seller’s name and on their credit report, but you make the payments. It’s often referred to as “Getting the Deed.”

2. Why would a seller agree to a “Subject To” transaction?

Sellers typically agree to “Subject To” deals when they’re facing foreclosure or are highly motivated to sell quickly. They may be behind on payments, have damaged credit, or simply need to get rid of the property for personal reasons. A “Subject To” sale can provide them with debt relief and avoid foreclosure damaging their credit further.

3. Won’t the bank call the loan due because of the due-on-sale clause?

Most mortgages have a due-on-sale clause that allows the lender to demand full payment of the loan if the property is sold without their consent. However, while banks have the right to call the loan due, they often choose not to if the mortgage payments are being made on time. Foreclosing is expensive and time-consuming for lenders, and they prefer to have performing loans on their books.

4. Do I need to qualify for a loan to buy a property “Subject To”?

No, you don’t need to qualify for a loan to purchase a property “Subject To.” This is a significant advantage for investors with limited credit or funds.

5. Is buying a property “Subject To” unethical or illegal?

No, it’s not unethical or illegal as long as both the buyer and seller are aware of the due-on-sale clause and its potential consequences. All parties should sign a clear agreement outlining the terms of the transaction and acknowledging the risks.

6. What are the advantages of buying “Subject To”?

• No Loan Qualification: You don’t need to qualify for a mortgage.
• Low Down Payment: You can acquire a property with little to no down payment.
• Faster Closing: The closing process is generally quicker and less expensive than traditional financing.
• Multiple Exit Strategies: You can hold the property as a rental, resell it with seller financing, or fix it up and sell it on the retail market.

7. What are the disadvantages of buying “Subject To”?

• Due-on-Sale Clause Risk: Although the risk is typically low, the lender could enforce the due-on-sale clause and demand full loan repayment.
• Resale Challenges: Some buyers may be hesitant to purchase a property with an underlying “Subject To” loan due to the potential for the loan to be called due.
• Potential Liability: If the original borrower defaults on the loan, the lender could foreclose on the property.

8. What legal documents are essential for a “Subject To” transaction?

• Purchase and Sale Agreement: This outlines the terms of the sale, including the “Subject To” financing arrangement.
• Seller’s Due-On-Sale Acknowledgment: This document confirms the seller’s awareness of the due-on-sale clause and the potential consequences of the transaction.
• Quitclaim Deed to Trustee: The seller deeds the property into a land trust, providing an added layer of protection for the buyer.
• Authorization to Release Mortgage Information: This allows the buyer to obtain information about the existing mortgage from the lender.
• Limited Power of Attorney: This grants the buyer limited authority to handle matters related to the property on behalf of the seller.
• Insurance and Escrow Documentation: These documents ensure that the buyer is covered by the insurance policy and can control the escrow account.