Frequently asked Subject To questions.

Why would any seller sell subject-to?

Sellers may consider utilizing the Subject-To method in low equity situations as it allows them to relinquish ownership of the property without the need for additional funds or having to write a check at closing. Depending on the seller's mortgage balance, this method may result in greater financial gain for the seller compared to a traditional sale. Additionally, it enables the seller to move on from the property as they are no longer responsible for expenses such as repairs, maintenance, utilities, taxes, insurance, and HOA fees. The seller's credit score may improve as a result of timely payments made towards the mortgage.

Is taking over a mortgage Subject-To legal?

  • Yes, this is a standard form that title/escrow companies and attorneys use to build settling statements (HUD-1). On the HUD-1 form, please note lines 203 and 503.

  • This link is the instructions to fill out the HUD-1. Please note: this is a Code of Federal Regulation (CFR) document. Page 396, second paragraph states: "Line 203 is used for cases in which the Borrower is assuming or taking title subject to an existing loan or lien on the property."

What about the Due on Sale clause?

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.

Actions to resolve:

  • Call the bank (loss mitigation) and identify ourselves as the buyer and that we purchased the house subject to.

  • Deed the property back to the owner.

  • Repurchase under an agreement for sale / executory contract. This is a legal way of taking ownership of a property without deed transferring to buyer. However, it allows buyer to control the deed an satisfies bank that the deed is still in seller’s name.

  • No action required by seller. Closing documents give buyer power of attorney for the mortgage only. This gives buyer permission to talk to the bank, ensure loan is paid, and pay off the loan without seller involvement.

What happens if the buyer misses a mortgage payment? How is the seller protected?

In the event of a default by the buyer, a pre-signed Deed in Lieu held by the servicing company would be utilized, thereby transferring the property back to the seller's possession. The seller would then benefit from any payments made towards the loan, improvements made to the property, and appreciation in the property's value. They may then choose to sell the property again for a higher value if desired. This strategy has been reported as advantageous by previous sellers, and they have expressed a desire for a default to occur.

How long will the buyer be paying off the loan?

  • The purchase agreement will be written in that the buyer will service the loan for the duration of the current mortgage terms.

  • It is most likely that the we will perform a cash out refinance in 7-10 years and pay off the existing mortgage. We do not write the contracts with this commitment because market conditions may change this and it is most important to us that we be able to perform.

How does this affect my Debt-To-Income (DTI)?

  • Servicing company (intermediary, Ex. - West Star) draws the money from buyers bank 5 days before payments are due and makes payments to: seller, mortgage, HOA, insurance, taxes, liens if any and sends an email receipt to all parties.

  • 75% of mortgage removed from DTI immediately

  • After 12 months of payment record established through a servicing company, 100% of the debt can be eliminated from the seller’s DTI.

  • If it is demonstrated to the bank that the new investor is making payments on then property, the bank wipes the old house off their DTI. Loan officers (their underwriter) need to know about a DTI declaration (there are loan officers that will understand this - the good ones will).

  • If buying a new house contingent upon the sale of their current home, subject to may not be the right fit for the seller.

What if home prices fall?

We are long term investors and only buy properties that cash flow. We expect market changes over time but in the end, real estate is going to win. We would hold the property and continue to rent it until the value of the home exceeds the debt we owe. At that point, we may sell or continue to hold.

How are utilities and insurance handled?

Our insurance agent will be responsible for replacing your current policy with our policy, which includes the addition of the sellers as additional insured parties. This will not only ensure our coverage under the policy, but also provide coverage for the sellers. We will take the necessary steps to transfer utility services into our name.

Additional Resources:

Check out Pace Morby’s Youtube channel, https://www.youtube.com/@PaceMorby. He does a really good job of presenting case studies on purchasing homes using creative finance.