Selling a home "Subject 2" the existing mortgage.

5 Replies

My question is about when a home owner sells their home "Subject 2" - meaning deeding the house to someone else but leaving their existing mortgage in place. If that seller tries to buy a new home afterwards, will the mortgage payment on the house they sold "Subject 2" count against their DTI when qualifying for a mortgage on their new house? On one hand, they don't have income (like rent) to offset the old mortgage. But on the other hand, someone else IS making the payments. How would most FHA and Conventional Underwriters handle this? Thanks!

Hi Kevin,

Most likely it will count against the DTI and it will most likely raise red flags for the underwriters. As you know the first thing that will be pulled up when applying for the new mortgage will be a credit report. The credit report will be showing the open mortgage. Since the seller is showing a mortgage, more than likely, he will not qualify for an FHA mortgage. It's possible that they could obtain a conventional loan assuming the ratios including the old and new mortgage still work.

I had a situation like this in 2003 when I owned a home and was looking to buy another as a real estate investment.  i didn't know what I was going to do with the current house, so I said it was a rental (had a friend sign a lease agreement).  I showed I had just leased it so the rent payments weren't showing on my bank statements yet.  I was able to close the loan on the second house (I closed in 2004 when money was cheap and as long as you could sign your name, you could a mortgage).

On way of handling this in the future is to have the "subject to" buyer send you the mortgage payment each month, you deposit the check, and write another check to the mortgage company.  Claim this property is a rental and your bank accounts will show the "rent" payments.  Make up a lease if you have to.  Just an idea.

So I guess the obvious answer is YES. The old Sub2 mortgage will need to be calculated into the sellers DTI when qualifying for a new house/mortgage?

Related question:  I've heard that if seller gives up and rents the house,... that lenders won't use the rental income to offset that house's mortgage for a whole year.  I guess to prove that the rent is real and builds a bit of a track record. 

Is that true? If so, for all mortgage types? Or only FHA,...? Thanks for the help!

Originally posted by @Michael Evans:

I had a situation like this in 2003 when I owned a home and was looking to buy another as a real estate investment.  i didn't know what I was going to do with the current house, so I said it was a rental (had a friend sign a lease agreement).  I showed I had just leased it so the rent payments weren't showing on my bank statements yet.  I was able to close the loan on the second house (I closed in 2004 when money was cheap and as long as you could sign your name, you could a mortgage).

On way of handling this in the future is to have the "subject to" buyer send you the mortgage payment each month, you deposit the check, and write another check to the mortgage company.  Claim this property is a rental and your bank accounts will show the "rent" payments.  Make up a lease if you have to.  Just an idea.

 The lender would pull a prelim and figure out that you don't own this property and may disallow your use of rents unless you had a master lease contract on the property still which legally gives you right to master lease it out to tenant so you can offset your mortgage on your credit report with the rents received.

It all depends on how you claim this if your accountant claims it on the schedule E it may work (what I am talking about above) because it will show income - mtg interest expense in a way most lenders like to see rental income.  I've done loans where I've seen the income reported on schedule B (interest and dividends) so the mortgage interest isnt linked to the rental income on the master lease and most lenders may not put two and two together and may still ding you for the mortgage separately and may give you income separately for interest received (rents). Some would say isnt that the same thing as having the income net against the mortgage? no its not, much worst but beyond the scope of this discussion.

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

Originally posted by @Kevin Enos:

My question is about when a home owner sells their home "Subject 2" - meaning deeding the house to someone else but leaving their existing mortgage in place. If that seller tries to buy a new home afterwards, will the mortgage payment on the house they sold "Subject 2" count against their DTI when qualifying for a mortgage on their new house? On one hand, they don't have income (like rent) to offset the old mortgage. But on the other hand, someone else IS making the payments. How would most FHA and Conventional Underwriters handle this? Thanks!

 Yes it would still get hit against you because you're still legally obligated to that promissory note that you signed.

They would pull a mortgage rating to see the payment history on the mortgage in the last 12 months. It doesnt matter someone else is making payments if you're the only obligator the underwriter will hit you for the payment in your DTI ratios because in the event no one did pay on the loan you'd be the only one they can go after so hence you're responsible still.

An exception would be if you had a coborrower on a loan and the coborrower could prove they've been paying for 12 months min on time then yes you can remove the mtg payment from your qualification (applies to conv & fha).

FHA also allows loan assumptions so you could always apply to see if your buyer can assume your loan so you dont have to sell your home subject 2.

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453