{"id":3601,"date":"2023-12-18T08:53:24","date_gmt":"2023-12-18T13:53:24","guid":{"rendered":"https:\/\/www.deeds.com\/articles\/?p=3601"},"modified":"2024-04-25T23:17:02","modified_gmt":"2024-04-26T03:17:02","slug":"what-is-subject-to-home-buying-aka-taking-over-the-mortgage-payments","status":"publish","type":"post","link":"https:\/\/www.deeds.com\/articles\/what-is-subject-to-home-buying-aka-taking-over-the-mortgage-payments\/","title":{"rendered":"What Is \u201cSubject-To\u201d Home Buying? AKA: Taking Over the Mortgage Payments"},"content":{"rendered":"\n
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Ever heard someone say they got a \u201csubject-to\u201d offer on their home? Or maybe you or someone you know is contacted with a subject-to offer. Maybe you saw a sign saying \u201cWe buy homes!\u201d and wondered what\u2019s going on.<\/p>\n\n\n\n

Subject-to is a little-known strategy in the world of deed transactions. It comes in many forms. But the gist of it is this. If the seller does a \u201csubject-to\u201d sale, a buyer agrees to take ownership without having to sign mortgage<\/a> documents. The purchase is \u201csubject to\u201d the current loan terms. And the buyer takes over the monthly payments.<\/p>\n\n\n\n

So, now you\u2019re wondering: Is this offer a good deal or a bad deal?<\/em><\/p>\n\n\n\n

Let\u2019s take a closer look.<\/p>\n\n\n\n\n\n\n\n

What Making (or Taking) a Subject-To Offer Means<\/h2>\n\n\n\n
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In a subject-to sale, the seller\u2019s mortgage stays right where it is. The deed can still be conveyed in this situation.<\/p>\n\n\n\n

Imagine being a homeowner who\u2019s motivated to sell. You get an offer from someone who wants to buy your home with the mortgage on it \u2014 discounted. If there\u2019s, say, $80,000 left on the mortgage, then your buyer will need to pay that off \u2014 so it\u2019s taken out of the purchase price.<\/p>\n\n\n\n

With this agreement, your buyer promises to take over payments on the mortgage loan (whew!), although the loan will stay under your name for the time being.<\/p>\n\n\n\n

Now, imagine you keep making your automatic monthly payments. And, by contractual agreement, the buyer of your home repays you every time.<\/p>\n\n\n\n

Why This Can Be a Good Deal<\/h2>\n\n\n\n

The subject-to strategy can be an appealing idea for a borrower who gets into a financial jam and is motivated to sell. But it\u2019s also considered a way to preserve a low interest rate.<\/p>\n\n\n\n

Say you, the seller, bought in 2021, and you grabbed an interest rate of 3%. Great job!<\/p>\n\n\n\n

Now you\u2019d like to sell, but today\u2019s loans today have an interest rate of 6% or more. You can\u2019t justify moving into a pricier mortgage. Now, it turns out there\u2019s a buyer out there who would happily pay you for a loan that charges under half of the going interest rate. Sure, the buyer could wait until rates drop back down to 3%<\/a> before buying \u2014 but that\u2019s unlikely to happen any time soon.<\/p>\n\n\n\n

So, with a subject-to deal, the buyer gets to have the home now, and keep that attractive mortgage no one wants to part with. Both sides feel they made a good, sensible deal.<\/p>\n\n\n\n

In fact, there are ways to make this transaction a win for everyone involved \u2014 and that can include a real estate agent. Plenty of professionals advertise themselves as open to creative purchase strategies.  <\/p>\n\n\n\n

Why This Can Be a Bad Deal<\/h2>\n\n\n\n

The buyer who becomes responsible for paying off a mortgage takes a risk. The lender could send a demand for a full loan payoff \u2014 if it notices and objects to the ownership transfer.<\/p>\n\n\n\n

Sellers take a risk in this kind of deal, too. There\u2019s obvious risk involved in leaving your debt to someone else to handle. With no new agreement in place between the new homeowner and your mortgage company, what\u2019s forcing that new homeowner to make the payments? The contract between you and the other person, sure. It says: Full payments must be submitted on time.<\/em> But what if that person stops paying you the monthly amount due? It\u2019s your credit history at stake. And that debt will also be a factor when you apply to get a new mortgage for some other home.<\/p>\n\n\n\n

Given the risk, is the subject-to transaction really a good deal? Why would a homeowner with a low interest rate sell the home, when they could build equity by keeping it? Even in cases where it seems there\u2019s no other option, the parties should consult individually with their real estate lawyers or financial advisers to understand if the reward covers the risk.<\/p>\n\n\n\n

Tax questions arise, too. For example: If you pay a mortgage that\u2019s in another person\u2019s name, how will you account for tax-deductible interest payments?<\/p>\n\n\n\n

Above all, no one wants to be on the hook for debt on a home they no longer have. Your contract must lay out consequences for nonpayment. It must say, for example, that as soon as a payment is late, the transaction converts to a rental agreement until the end of the mortgage. As you can see, a real estate lawyer is necessary to ensure well-drafted contractual language.<\/p>\n\n\n\n

Do Mortgage Companies Actually Allow Subject-To Deals?<\/h2>\n\n\n\n

A lending institution can benefit from a subject-to deal, if it saves a mortgage. Then again, the lender might believe the deal is putting the loan at risk, not saving it. The lender can then point to the mortgage\u2019s acceleration clause (the \u201cdue-on sale\u201d clause) that a transfer of the deed triggers (with a few exceptions, as with selling among family members).<\/p>\n\n\n\n

What happens if a due-on-sale clause gets triggered? The buyer will suddenly have to pay off the mortgage entirely to keep the property.<\/p>\n\n\n\n

Is there a safe way to avert this? Yes. Get the mortgage company to approve the deed conveyance. (There will be administrative charges if the lender vets the buyer, and accepts the ownership change.)<\/p>\n\n\n\n

In some subject-to transactions, to avoid strict loan acceleration rules, no one tells the mortgage company about the sale at all. The company simply collects the on-time payments from the original borrower, who\u2019s receiving the funds from the new homeowner.<\/p>\n\n\n\n

And the mortgage plays itself out, with the company none the wiser.  <\/p>\n\n\n\n

Is This Even Legal?<\/h2>\n\n\n\n

Can you avoid involving the mortgage professionals and stay on the right side of the law? Selling and buying subject-to is legal; the question is whether it\u2019s acceptable under the terms of the mortgage contract. For an agent, it\u2019s whether professional responsibility rules out helping a client breach a contract.<\/p>\n\n\n\n

A subject-to transfer of the deed is not the same as a mortgage assumption!<\/em><\/strong> VA loans and FHA loans have a built-in allowance for the seller to actually transfer the loan along with the home. This is called assuming the loan, and it means the seller is off the hook officially. Read more about <\/strong><\/em>assumable mortgage loans<\/em><\/strong><\/a> on Deeds.com.<\/strong><\/em><\/pre>\n\n\n\n
A discussion of ethics codes or lenders\u2019 rights might seem overly formal. After all, our mortgage companies regularly sell our debt off to servicers, who sell these debts again. If rates today are over 6%, and you have a mortgage with a 3% rate, you have a fabulous feature for a buyer who wants your home subject-to. Shouldn\u2019t the parties be free to strike such a bargain?<\/p>\n\n\n\n
Fair question. But look at it this way. While subletting your apartment might be a financial win-win, you still look at your contract to know if you\u2019re clear to proceed.<\/p>\n\n\n\n
So, a discussion of the formalities isn\u2019t really overkill. If the parties cannot get the lender\u2019s go-ahead on the deal, we\u2019d have to call it a matter for their legal experts.<\/p>\n\n\n\n
When Investors Buy Homes Subject to Debt<\/h2>\n\n\n\n
Some investors buy subject-to homes as a strategy. They seek good deals from desperate homeowners. They make a business out of contacting these prospects \u2014 often sending multiple low, subject-to offers a week. You might also run into these dealmakers, along with people offering homes with assumable mortgages, among the real estate services in the classified ads online.<\/p>\n\n\n\n
Investor-buyers advertise and also scan public records in order to engage:<\/p>\n\n\n\n