FAQ: Subject To
What is Subject To?
"Subject-To" is a way of purchasing/transferring real estate where the buyer takes title to the property, and the existing loan stays in the name of the seller. In other words, the sale is completed "Subject-To" the existing financing. The buyer now controls the property, takes on all responsibilities of ownership, and makes the on-time mortgage payments on the seller's existing mortgage.
Is Subject to legal?
Yes. Fill-able HUD-1 is a standard form that title/escrow companies and attorneys use to build settling statements. Please note lines 203 and 503. 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.”
Is this an assumption?
No, we purchase properties subject to the underlying mortgage staying in place. We become responsible for making the monthly payments and even use a third-party servicing company to automatically make the payments every month.
What if you stop paying?
We're not in the business of losing money, so we set money aside to prevent this from occurring. In the unlikely event this does happen, you are protected by the same instrument a bank uses to keep their money safe, a Promissory Note and Deed of Trust.
What happens if the Due On Sale clause gets called?
This rarely happens but if it does, we will first speak with the bank and explain what we are doing, and work on getting their approval to proceed making the payments. Remember that banks are not in the business to foreclose. If the bank is not willing to work with us, then we will deed the house back to the seller and instead purchase it using a lease option. All of the terms remain the same.
As an agent, I don't feel comfortable with this type of transaction.
We have absolutely no problem paying your commission directly through the agreement and working directly with the homeowner so that you have no liability in the transaction.
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. Our company will be responsible for all things related to insuring the property and entitled to any claims. We will take the necessary steps to transfer utility services into our name.
What if the property value goes down?
Equity comes and goes but rent rates are more stable and always trend up. Property values are not as important to us as having the ability to cash flow. We have various exit strategies we utilize to make sure we can thrive in any market condition.
Why would any seller do this?
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.
How can the seller verify that payments are being made?
The buyer engages the services of a third-party loan servicing company, which is responsible for facilitating the monthly mortgage payments. Additionally, the sellers have the option to elect to receive notifications on a monthly basis, indicating that the mortgage payments have been fulfilled.