1. Is Subject-To legal?

Yes, the "Subject-To" method is legal throughout the United States, but certain legal requirements and considerations must be met to ensure compliance with state laws and mortgage agreements.

2. What is "Subject-To" in a real estate transaction?

In a real estate transaction, a "Subject-To" agreement occurs when you buy a property "subject to" the existing mortgage.
This means you assume the mortgage payments, but the previous owner remains responsible to the lender.
Typically, as the buyer, you commit to making all mortgage payments from that point forward (without informing the lender of this transfer). As long as you continue making payments, you are the legitimate owner of the property.

3. Do I need a Real Estate agent for Subject-To?

It is not mandatory to have a real estate agent for a "Subject-To" transaction. An experienced agent in this type of transaction can guide you through the process. However, an agent unfamiliar with these negotiations may be of little help and could prevent the deal from successfully closing.

4. What’s the difference between Subject-To and a mortgage assumption?

The main difference between a "Subject-To" agreement and a mortgage assumption is that, in "Subject-To," the previous owner remains responsible for the mortgage. This means that if the buyer doesn’t pay, the lender can still pursue the seller. Sellers may opt for a "Subject-To" agreement for various reasons: if they owe more than the property is worth (which complicates a mortgage assumption) or if they need to sell quickly to avoid foreclosure or bankruptcy, as "Subject-To" is faster and less expensive than a mortgage assumption.

5. Two types of Subject-To in real estate negotiations:

a) Wrap-Around Subject-To
This is the less common type of real estate "Subject-To" agreement.
In a wrap-around agreement, the loan's interest rate is calculated using the original mortgage, but with an added extra.
b) Subject-To with seller financing
The second type of "Subject-To" agreement is when the seller finances part of the purchase price or provides financing for the buyer.

6. What is the due-on-sale clause?

It is a provision included in most mortgage contracts that gives the lender the right to demand full payment of the outstanding loan balance if the property is sold or transferred to a third party without their prior consent.
It is important to note that while this clause exists in most mortgage contracts, it does not always activate automatically.

7. What does the seller receive?

The seller benefits by avoiding foreclosure or a short sale, as the buyer assumes their mortgage payments. Additionally, if the property is worth more than the outstanding debt, the buyer pays the difference in cash. For example, if the property is worth $100,000 and the debt is $80,000, the buyer pays $20,000 and assumes the mortgage. This method benefits both: the seller eases their financial situation, and the buyer acquires the property quickly and at a reduced price.

8. Benefits for sellers:
  • Avoid foreclosure or bankruptcy: If the seller is at risk of defaulting on their mortgage, a "Subject-To" agreement can help them avoid these financial problems.
  • Quick sale: These agreements allow for a quick sale, ideal for those who need to offload the property urgently, such as when relocating for work.
  • Down payment: In some cases, the buyer pays the seller an upfront sum for taking over the mortgage payments, which can be helpful for sellers facing financial issues.
  • No repairs: The buyer takes responsibility for repairs, unlike in a traditional sale.
9. What happens to my existing mortgage?

The mortgage remains in the seller’s name, but the buyer assumes the payments. The loan is not formally transferred to the buyer.

10. Will my credit be affected?

If the buyer makes the payments on time, the seller’s credit may improve. However, if the buyer defaults, the seller’s credit could be negatively affected since the mortgage remains in their name.

11. Does the lender need to be informed?

It’s not mandatory to inform the lender, but it could activate the due-on-sale clause, which would allow the lender to demand full payment of the loan if they discover the property transfer.

12. How long will the mortgage stay in the seller’s name?

The mortgage will remain in the seller’s name until it’s fully paid off. However, buyers typically keep the property for about 7 years on average.

13. Who is responsible for insurance, taxes, repairs, and maintenance?

The buyer is responsible for all repairs, maintenance, taxes, and insurance once the deed is transferred to their name. It’s essential that these details are clearly specified in the contract.

14. What type of contract is needed?

A clear, well-drafted contract is required that establishes the buyer’s responsibilities and ensures that mortgage payments are made properly.

15. Will this affect my debt-to-income ratio (DTI) when buying another property?

Yes, the existing mortgage will still affect your DTI. However, after one year of on-time payments, it can be reduced or removed from the DTI calculation. For VA loans, it will depend on the remaining entitlement for your next property.

16. Can I buy another property while the mortgage is still in my name?

This will depend on your credit capacity and how the payments on the existing mortgage affect your DTI.

17. Risk mitigation for sellers
  • Work with a trusted and experienced investor.
  • Put everything in writing, such as the agreement terms and payment plan.

18. How does the Subject-To method work for buyers?

The buyer acquires the property and assumes the existing mortgage payments, but the mortgage remains in the seller’s name. The loan is not formally transferred, and the buyer is responsible for making the agreed-upon payments.

19. Benefits for buyers with Subject-To
  • Acquire a property at a significant discount: Since you’re not taking out a new loan, you save on origination costs, appraisals, and other closing expenses, potentially saving you thousands of dollars.
  • Assume an existing mortgage with a low interest rate: In many cases, the seller’s mortgage has a lower interest rate than what you could get with a new loan, especially if the property was acquired when rates were lower.
  • Buy with a small down payment: In a traditional agreement, you’d need a significant down payment or to buy the property in cash. With a "Subject-To" agreement, you can acquire the property with very little upfront.

Quick closing: "Subject-To" agreements usually close faster, as they don’t involve lenders or title companies.

20. Which title companies do we work with?
21. Should home inspections or appraisals be done?

This is not a legal requirement in these types of transactions.
However, both inspections and appraisals are steps you can take as a buyer to protect your interests and ensure you are making an informed and fair purchase.
Keep in mind that inspection and appraisal costs are the responsibility of the buyer.
Here’s an appraiser and an inspector with whom we have a strategic alliance for our business:

Appraisals:
Randy Randal Russo
FA 040027082
Mobile: +1 (303)929-3461
Office: +1 (303)798-4300
8600 Park Meadows Drive 300
Lone Tree, CO 80124

Inspector:
Michael Gallegos
FCHS Inspections
Mobile: +1 (720)413-0639

22. Do I need to qualify for a loan?

No, you do not need to qualify for a new loan because you are taking over an existing mortgage. This is an advantage if you are having difficulty obtaining traditional financing.

23. What happens if the lender discovers the transaction?

While the transaction is legal, it may violate the due-on-sale clause. If the lender finds out, they could demand full payment of the remaining loan balance.

24. How do I know the seller cannot claim rights to the house in the future?

The documents executed in these types of transactions are carefully and professionally prepared. These documents clearly state that the seller relinquishes all rights to the property at the time of signing. Additionally, the seller signs a legal power of attorney to provide double protection to the buyer.

25. What are my responsibilities as a buyer?

You will be responsible for making the mortgage payments, as well as for the maintenance, repairs, insurance, and taxes on the property. These responsibilities must be clearly specified in the contract.

26. What happens if I cannot make the payments?

If you stop making payments, you risk the property being reclaimed by the seller through a Deed of Performance or, in some cases, you could lose the home.

27. Can the seller still be responsible for the loan?

Yes, the mortgage remains in the seller’s name, which means that if payments are not made, their credit could be negatively affected.

28. What happens with the down payment at closing?

The down payment is split into two parts: one part goes to the seller, and the other covers closing costs and the commissions of the professionals involved.

29. What percentage of the down payment goes toward the mortgage principal?

In most cases, the down payment is not used to pay the mortgage principal unless the seller is behind on payments or the property has significant equity. Typically, the down payment covers closing costs and commissions.

30. Can I sell the property in the future?

Yes, as the homeowner, you can sell the property in the future, but the mortgage will remain in the seller’s name until it is fully paid off, or the lender agrees to other terms.

31. Can I change the mortgage terms?

No, the terms of the mortgage, such as the interest rate and duration, cannot be changed since the mortgage remains in the seller’s name.

32. Is it cheaper to buy a house with the "Subject-To" method?

This method can allow you to acquire a property with little or no down payment and benefit from lower interest rates if the existing mortgage has favorable terms.

33. Will this affect my debt-to-income ratio (DTI) when buying another property?

For conventional or FHA loans, the seller's DTI can be reduced by 75% after one month of timely payments and by 100% after a year, as long as payments are made on time. However, for VA loans, it will depend on the remaining entitlement for the new property.

34. Risks for buyers in Subject-To negotiations
  • Due-on-sale clause: The lender might demand full payment of the loan if the property is transferred, which affects the seller’s credit and the buyer’s title. Although it’s rare for lenders to do this, it’s important to be aware of the risk.
  • Loss of the property: If the buyer stops making payments, the seller could lose the home.
  • Credit impact: If the buyer doesn’t pay on time, the seller’s credit could be affected, but if the buyer pays promptly, the seller’s credit could improve.
  • Responsibility: The seller remains responsible for the mortgage, even if the buyer defaults on payments.
35. Risk mitigation for buyers
  • Put everything in writing, including payment terms and agreements.
  • Obtain insurance for the property. When taking out the insurance policy, it’s essential to include the seller as an additional insured. This ensures the bank recognizes them as part of the policy, protecting their interests and helping avoid potential complications with the lender.
  • Conduct due diligence by researching the property and the market.
  • Investigate state laws, as they vary regarding due-on-sale clauses.

NOTE: This material was created by Casa Para Todos from various sources to train our agents. We suggest that if you wish to obtain more information or additional advice, consult other specialized references, an attorney, or a professional who understands the "Subject-To" method.

William Bill Bronchick
+1 (303)398-7032
Legalwiz.com