Apr 9, 2023

What is Subject-To Financing?

A subject-to real estate transaction, also known as a subject-to mortgage or subject-to financing, is a creative financing strategy that allows a buyer to purchase a property while leaving the existing mortgage in place. In essence, the buyer takes over the mortgage payments from the seller, but the original mortgage remains in the seller's name.

The subject-to transaction can be a win-win situation for both parties. For the seller, it allows them to sell their property without having to pay off their existing mortgage, which can be particularly beneficial if they have a low interest rate or if they owe more on the mortgage than the property is worth. The buyer, on the other hand, can acquire a property without having to go through the traditional mortgage approval process and can potentially obtain a more favorable interest rate by assuming the seller's existing mortgage.

However, subject-to transactions are not without risks. Because the original mortgage remains in the seller's name, the buyer takes on the risk that the seller could default on their mortgage payments or that the lender could call the loan due, known as a "due-on-sale" clause. This risk can be mitigated by creating a contract that outlines the terms of the subject-to transaction and by ensuring that the seller remains current on their mortgage payments.

Subject-to transactions are not suitable for all sellers or buyers. For sellers, they may not be able to sell their property subject-to if their mortgage contains a due-on-sale clause, or if the lender does not allow for a transfer of the mortgage. Buyers may not be able to qualify for assuming the seller's mortgage if they have poor credit or if the lender requires a down payment or other fees.

It's important to note that subject-to transactions should only be attempted with the guidance of an experienced real estate attorney or other professional. The legal and financial implications of a subject-to transaction can be complex, and it's essential to ensure that all parties involved are fully informed and protected.

In conclusion, a subject-to real estate transaction can be a creative way to buy or sell a property, but it's not without risks. It's important to fully understand the implications and to work with professionals to ensure that the transaction is handled properly.