What is “Subject to” and When is it a Good Strategy?
When you are in the market looking for an investment property or a home to use as your primary residence, you don’t have to limit yourself to traditional financing options like a mortgage from a conventional lender. Savvy investors are actually have many choices when it comes to financing options. These options include lease option, hard money lending, and owner financing. One method that is particularly soaring in popularity is to buy a property ‘subject to’ existing mortgage. This strategy is beneficial to both buyers and sellers in most cases.
How is ‘subject to’ different from ‘assuming a loan’?
When you buy a property ‘subject to’ existing mortgage, the seller transfers the title of the property to you, but the liability of the mortgage is not transferred. It remains in the name of the seller. You make the mortgage payments, but if you default, it won’t show on your credit report. If the lender forecloses due to non-payment of the loan, the foreclosure will also not show on your credit report.
The concept is different from assuming a mortgage from seller. When you assume the mortgage, the liability for making mortgage payments also transfers to you along with the property’s title. In this case, non-payment of mortgage installments will show up on your credit report.
Why will a homeowner want to sell a property ‘subject to’?
Most contracts signed when purchasing a property have a ‘due-on-sale’ clause. A homeowner who financed the deal with a conventional mortgage is bound by this clause if he or she wants to sell the property. The clause means that the owner will have to pay the outstanding mortgage amount in full at the time of transferring his or her interest in the property to someone else.
If a homeowner is struggling with mortgage payments, he or she has three options:
- he or she will have to short sale,
- the lender will foreclosure, or
- he or she will have to file for bankruptcy.
All these options show up on the seller’s credit report. In order to avoid this, the homeowner can sell the property ‘subject to existing mortgage’. If the new owner stays current on the payment, the seller is able to avoid taking drastic measures like foreclosure, short sale or bankruptcy filing.
Why will a buyer purchase a property ‘subject to’?
“Subject to” financing provides many benefits to a buyer. A buyer will not have to make a down payment and other fees paid to the lender for processing a mortgage application. You will be able to close quickly because you won’t have to wait for your mortgage application to be approved by the lender. There is no need to get pre-approved or wait for the appraisal report. While the seller may want to check your background and financial history before proceeding with a ‘subject to’ sale, your credit score is less likely to be relevant.
Many buyers believe that another advantage of buying ‘subject to’ is that even if they stopped making payments, they won’t be held liable. But keep in mind, though it won’t show on your credit report, you can land in serious legal troubles if you stop making payments.