Frequently asked Subject To questions.

What are the benefits to a Subject-To transaction?

  1. Seller can often obtain a higher purchase price than through a traditional sale.

  2. Seller maintains their equity. They often leave closing with more equity than a traditional sale as the buyer will pay listing agent commission (if there is an agent) and buyer pays additional closing costs.

  3. Seller is alleviated of the financial responsibility of supporting a property that they are challenged to continue to pay for.

  4. Buyer gets to take over the existing lien on the home often resulting in a lower interest rate than current market interest rate.

  5. Can close in as little as 3 weeks. We are flexible to the seller’s timing requests.

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?

  • There will addendum to the purchase contract prepared by title that includes a performance clause of a deed in lieu of foreclosure. This means that in the event that the buyer did not fulfill their obligations (i.e. - missed a payment) the home would be deeded back to the seller without having to go through the foreclosure process.

  • The seller would benefit in that they would keep the buyer’s original down payment and receive a property that has been improved and appreciated in value. This would be a significant loss for the buyer and thus they are highly incentivized to perform.

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 5-7 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?

  • We establish an insurance policy in our name and add the homeowner as additionally insured (the seller name is still tied to the mortgage, otherwise we cannot obtain insurance policy on the property)

  • Utilities would be swapped into our name.

What are the steps required to complete a Subject To transaction?

  1. A Purchase and Sale Agreement would be signed with the agreed upon terms.

  2. We hire and pay for a Transaction Coordinator (TC) trained by an attorney who knows how to perform these actions.

  3. Escrow would be opened with a Title Company/ Attorney of the Buyer's choosing. We work with an entire network of Title Companies/Attorneys throughout the United States.

  4. Prior to closing, the deed is transferred, loan servicing is set up with a loan servicing company.

  5. A power of attorney/authorization to release information will be signed in order to add ourselves to the insurance policy and name the seller as an additional insured.

How do I get my monthly payments on any equity owed to me?

  • The servicing company will deposit the money directly into your bank account and email you a receipt. Arrangements can be made if you prefer to receive your payments in a different manner.

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.