How Subject-To Loans Work in Real Estate

Buying a property “ subject-to ” means a buyer basically takes over the seller ’ s remaining mortgage balance without making it official with the lender. It ’ s a popular scheme among real estate of the realm investors. When interest rates rise, it may besides be an attractive financing option for general homebuyers .

Learn more about buying subject-to, how it works, and the pros and cons of this strategy .

Key Takeaways

  • Buying subject-to means the homebuyer is taking over the mortgage payments with no official agreement in place with the lender. 
  • Buying a subject-to home is attractive to buyers if they can get a lower interest rate by taking over payments. 
  • This arrangement poses risks for the buyer if the lender requires a full loan payoff or if the seller goes into bankruptcy.

What Does Buying “ Subject-To ” Mean in Real Estate ?

Buying subject-to means buying a home subject-to the existing mortgage. It means that the seller is not paying off the existing mortgage. alternatively, the buyer is taking over the payments. The amateur poise of the existing mortgage is then calculated as separate of the buyer ‘s purchase price .

For exemplar, suppose the seller took out a mortgage for $ 200,000. They had paid $ 150,000 of it before they decided to sell the home. The new buyers would then make payments on the remaining $ 50,000 .

Under a subject-to agreement, the buyer continues making payments to the seller ’ second mortgage party. however, there ’ s no official agreement in place with the lender. The buyer has no legal duty to make the payments. Should the buyer fail to repay the loanword, the home could be lost to foreclosure. however, it would be in the original mortgagee ’ s name ( i.e., the seller ‘s ) .

Reasons a Buyer May Purchase a Subject-To place

The biggest perk up of buying subject-to real estate is that it reduces the costs to buy the home. There are no close costs, initiation fees, broker commissions, or other costs. For the real estate investor who plans to rent or re-sell the property down the production line, that means more room for profits .

For most homebuyers, the primary reason for buying subject-to properties is to take over the seller ‘s existing matter to rate. If salute interest rates are at 4 % and a seller has a 2 % fixed sake rate, that 2 % division can make a huge remainder in the buyer ‘s monthly payment. For exemplar :

  • A $200,000 mortgage at a 2% interest rate is amortized at a payment of $739.24 per month.
  • A $200,000 mortgage at a 4% interest rate is amortized at a payment of $954.83 per month.
  • The monthly savings to a buyer under these circumstances is $215.59 or $2,587.08 per year.

Another reason that certain buyers are matter to in purchasing a home subject-to is they might not qualify for a traditional loan with favorable concern rates. Taking over the existing mortgage lend might offer better terms and lower interest costs over prison term .


Buying subject-to homes is a smart way for substantial estate investors to get deals. Investors may use county records to locate borrowers who are presently in foreclosure. Making them a first gear, subject-to offer can help them avoid foreclosure ( and its affect on their credit ) and consequence in a high-profit property for the investor.

3 Types of Subject-To Options

not all subject-to loans look the lapp. typically, there are three types of subject-to options .

A Straight Subject-To, Cash-To Loan

The most common type of subject-to occurs when a buyer pays in cash the difference between the purchase price and the seller ‘s existing lend proportion. For exercise, if the seller ‘s existing loan balance is $ 150,000, and the sales price is $ 200,000, the buyer must give the seller $ 50,000 .

A straight Subject-To With Seller Carryback

seller carrybacks, besides known as “ seller finance ” or “ owner financing, ” are most normally found in the form of a second mortgage. A seller carryback could besides be a bring condense or a lease option sale musical instrument .

For exercise, suppose the home ‘s sales price is $ 200,000, with an existing loanword balance of $ 150,000. The buyer is making a down payment of $ 20,000. The seller would carry the remaining balance of $ 30,000 at a disjoined interest rate and terms negotiated between the parties. The buyer would agree to make one payment to the seller ‘s lender and a discriminate payment at a different matter to rate to the seller .

Wrap-Around Subject-To

A wrap-around subject-to gives the seller an override of pastime, because the seller makes money on the existing mortgage balance. A wrap-around is another loanword that contains the first, and it can be seller-financed .

Using the model above, suppose the existing mortgage carries an interest rate of 2 %. If the sales price is $ 200,000, and the buyer puts devour $ 20,000, the seller ‘s carryback would be $ 180,000 .

By charging the buyer 3 %, the seller makes 1 % on the existing mortgage of $ 150,000 and 3 % on the libra of $ 30,000. The buyer would pay 3 % on $ 180,000 .

Subject-To vs. Loan Assumption

In a subject-to transaction, neither the seller nor the buyer tells the existing lender that the seller has sold the property. The buyer begins to make the payments and does not obtain the bank ‘s license to take over the loanword.


Lenders put special wording into their mortgages and trust deeds that give the lender the properly to accelerate the loanword and invoke a “ due-on ” clause in the event of a transfer. It means the loan proportion is due in wide, and that could put the new homeowner at risk of losing the home if the lender finds out about the remove. not every depository financial institution will call a loan due and collectible upon transfer. In certain situations, some banks are just happy that somebody—anybody—is making the payments .

But banks can exercise their right to call a lend, ascribable to the acceleration article in the mortgage or trust act, which is a risk for the buyer. If the buyer does n’t have the cash in hand to pay off the lend upon the depository financial institution ‘s demand, it could initiate foreclosure .

Loan premise, on the other hand, is different from a subject-to transaction. If a buyer makes a loan premise, the buyer formally assumes the loan with the trust ‘s license. This method means that the seller ‘s name is removed from the loan, and the buyer qualifies for the loanword, good like any other kind of financing .

broadly, the bank charges the buyer an premise tip to process a lend assumption. The fee is much less than the fees to obtain a conventional loan. VA loans and FHA loans allow for a loan assumption. however, most conventional loans do not .

Pros and Cons of Buying Subject-To Real Estate

Subject-to properties mean a quicker, easier home leverage, no costly or hard-to-qualify-for mortgage loans, and potentially more profits if you ‘re looking to flip or resell the home .

On the downside, subject-to homes do put buyers at risk. Since the place is hush legally the seller ‘s liability, it could be seized should they enter bankruptcy. additionally, the lender could require full wages if it notices that the home has transferred hands. There can besides be complications with home indemnity policies .


  • Fewer upfront costs
  • Faster sale
  • Easier to qualify
  • May mean more profits for investors
  • May mean more favorable concern rates


  • home could be seized if seller goes into bankruptcy
  • lender could accelerate the lend and require wax wages
  • Insuring home could be complicated

The Bottom Line

While a subject-to sale may seem desirable for some, it comes with risks for buyers and sellers. Before entering into this type of agreement, you should understand the assorted options along with their benefits and drawbacks .

frequently Asked Questions ( FAQs )

How do you find subject-to real estate deals?

To find subject-to sellers, you need to look for homeowners selling dysphoric properties, such as foreclosures, short sales, and auctioned homes. You can find these with on-line search tools or with the aid of a real estate of the realm agent.

Why would a seller agree to a subject-to mortgage?

Sellers agree to subject-to mortgages when they are desperate to sell a dwelling quickly. They may be in danger of foreclosure or ineffective to keep up with their mortgage payments. It may not be an ideal scenario, but it can make for a immediate sale by keeping the bank out of the equation .

source :
Category : Finance

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