Buying real estate "subject-to" refers to a creative financing strategy in which a buyer purchases a property subject to the existing mortgage or financing already in place, rather than obtaining a new loan to pay off the seller's mortgage. Essentially, the buyer takes over the seller's mortgage payments without formally assuming the loan or getting approval from the lender. The title of the property transfers to the buyer, but the original mortgage remains in the seller’s name.
Here’s how it typically works:
Agreement with the Seller: The buyer and seller agree that the buyer will take ownership of the property "subject to" the existing mortgage. The seller deeds the property to the buyer, but the mortgage stays in the seller’s name with the original terms intact.
Buyer Takes Over Payments: The buyer begins making the monthly mortgage payments directly to the lender on behalf of the seller. The lender isn’t usually notified of the ownership change, as the loan itself isn’t being assumed or refinanced.
Equity Opportunity: If the property’s value exceeds the remaining mortgage balance, the buyer can benefit from instant equity. For example, if the home is worth $200,000 and the mortgage balance is $150,000, the buyer gains $50,000 in equity (minus any additional costs or cash paid to the seller).
Seller Motivation: Sellers often agree to this arrangement if they’re in financial distress (e.g., facing foreclosure), want to avoid the hassle of selling traditionally, or need to offload the property quickly. The seller might also receive a small cash payment from the buyer as part of the deal.
Key Benefits
No New Financing Needed: Buyers don’t need to qualify for a new loan, which is great for those with poor credit or limited funds.
Lower Costs: Avoids traditional closing costs, loan origination fees, and sometimes even down payments.
Flexibility: Can be a win-win for buyers seeking deals and sellers in tough situations.
Risks and Considerations
Due-on-Sale Clause: Most mortgages have a clause allowing the lender to demand full repayment if the property is sold or transferred. While lenders rarely enforce this in practice (as long as payments are made), it’s a legal risk.
Seller’s Credit: The mortgage stays in the seller’s name, so missed payments by the buyer could damage the seller’s credit.
Trust Required: The buyer must trust the seller to disclose the accurate mortgage balance and terms, and the seller must trust the buyer to keep making payments.
Example
Imagine a seller owes $120,000 on a home worth $180,000 and can’t keep up with payments. A buyer offers to take the property "subject-to" the $120,000 mortgage and pays the seller $5,000 cash for their equity. The buyer now owns the home, makes the $800/month mortgage payments, and could sell or refinance later for a profit.
This strategy is popular among real estate investors, especially in markets where traditional financing is harder to secure. However, it’s not as common in mainstream homebuying due to the risks and the need for careful legal documentation (like a proper deed transfer and purchase agreement). If you’re considering this, consulting a real estate attorney or expert is a smart move to navigate the specifics.
