Buying Real Estate Subject to an Existing Mortgage

Kelly Hernandez
A mortgage application sits under a pen.

Table of Contents

What Does Buying Real Estate Subject-to Mean?

In most traditional real estate transactions, a buyer obtains a new home mortgage for the purchase. If the current homeowner has a mortgage on the property, they satisfy their debt with the lender and it’s the buyer’s responsibility to find and maintain their own financing.

However, when you buy a property “subject-to,” the seller doesn’t satisfy the current home loan. The loan balance is a part of the buyer’s purchase price and the lender isn’t informed that the home has a new owner. The buyer is provided with the home deed but the transaction is not recorded with the lender.

The buyer sends monthly mortgage payments to the seller. It’s the seller’s responsibility to forward these payments on to the mortgage company until the loan is satisfied. A subject-to real estate transaction is common with real estate investors because it’s a fast way to take over property ownership.

Subject-to vs. Loan Assumption

While a subject-to real estate transaction sounds similar to a loan assumption, there are differences. With a loan assumption, the seller and buyer inform the lender that ownership has changed hands.

Once the lender is informed of the sale, they may ask for the entire loan balance payment in a lump sum or it may qualify the new owner for a new loan. To qualify, the homebuyer might need to have their credit checked and pay closing costs with the lender.

The terms of this loan are usually different than what the seller had and may include a higher interest rate. Once the buyer agrees to new loan terms, the loan is placed in their name and the seller can walk away with no liabilities.

In a subject-to real estate transaction, the lender isn’t informed of the home sale at all. The seller still makes monthly payments to the lender as they were doing when they had ownership of the property.

Types of Subject-to Purchases

There are different ways a buyer and seller can agree to engage in a subject-to real estate transaction.

A Straight Subject-to Cash-to Loan

This is the most common type of subject-to purchase since it’s a straightforward and simple agreement. When both parties agree to this transaction, the buyer must directly provide the seller with the difference between the purchase price and the loan balance in cash. Then, the buyer pays the seller mortgage payments each month and the seller sends them to the lender until the loan is satisfied.

A Straight Subject-to With Seller Carryback

In this type of subject-to transaction, the buyer isn’t responsible for paying the entire difference between the purchase price and the loan balance. The seller creates another loan to cover this difference. This is called the “seller carryback” and the seller sets their own terms for this second mortgage, including the interest rate and monthly payment.

The buyer pays the seller for both the existing mortgage on the home and the seller carryback. The seller keeps the payment to cover the seller carryback loan and pays the existing lender the rest to cover the home’s existing mortgage.

Wrap-around Subject-to

In a wrap-around subject-to transaction, the seller sets the interest rate for the financed portion of the purchase price. The buyer provides a down payment and the rest of the loan balance is subject to the seller’s loan terms.

Even if the lender only has an interest rate set at 5%, the seller may decide to charge the buyer a 6% interest rate on the balance remaining. The seller sends the mortgage payment to the lender but keeps the rest.

Reasons a Buyer May Purchase Subject-to Real Estate

A subject-to real estate transaction doesn’t involve paying off a loan and obtaining a new one, so it’s generally a faster process. Real estate investors benefit from this type of transaction because they can take over ownership faster and begin to work on flipping the property. This type of transaction also doesn’t involve:

  • Closing costs.
  • Broker’s fees.
  • Origination fees.
  • Other costs associated with a new home loan.

This type of transaction is also appealing for potential home buyers who may not qualify for a conventional or FHA home loan. Buyers with low credit scores or high debt-to-income ratios may find better loan terms with a subject-to transaction because they don’t have to qualify for a new mortgage.

Benefits of Buying Real Estate Subject to Existing Financing

There are some benefits to buying real estate in a subject-to transaction, including the following:

  • The buyer doesn’t need to qualify for a new mortgage.
  • Both parties may close quickly on the property.
  • The buyer may have more favorable loan terms, including a lower interest rate.
  • Real estate investors may make more profit from the transaction.

If a seller is at risk for foreclosure, selling the property in a subject-to transaction allows them to avoid this judgement and satisfy the loan successfully with help from the buyer.

Risks of Buying Real Estate Subject to Existing Financing

While buying real estate subject to existing financing has its benefits, there are also risks associated with this type of transaction, such as:

  • The seller may not make the mortgage payments to the lender and the bank could seize the property.
  • The lender could find out about the ownership change and demand the loan be satisfied.
  • Homeowners insurance companies may be hesitant to insure the home if the lender isn’t aware of the new owner.

Buying a home in a subject-to real estate transaction may be beneficial for real estate investors who need to close quickly or buyers who don’t qualify for financing. There are risks associated with this type of transaction so it’s important that both parties feel comfortable with the agreement before transferring ownership.

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