How Does Subject To Financing Work?

Question

I'm currently studying "subject to" financing. I understand that as the buyer, the benefit is taking over the seller's mortgage payments which may be more favorable thank taking on a PITI in the current market.

What I don't understand is, what is the benefit to the seller? The only thing I can think of is that they don't have any equity in the property or just really really don't want to deal with it anymore.

Lastly, how do the banks get involved? The Seller's bank needs to be notified of the title transfer, right? And does the buyer need their own bank to finance or are they literally just using seller's bank still when they take over the existing mortgage payments?

Looking forward to learning more about this!

April Rae · Answer

Hello!Subject to deals are definitely a fascinating area of real estate financing. Here's a general picture of how it works and its implications for both buyers and sellers.

Benefits to the Seller: The primary benefit to the seller in a "subject to" transaction is the ability to quickly unload a property without having to pay off the existing mortgage immediately. This can be particularly appealing if the seller is facing financial difficulties, needs to move quickly (perhaps due to relocation, divorce, or other personal issues), or the property has little to no equity and they can't afford to sell it through traditional means without bringing money to the closing. It essentially allows them to pass the financial responsibility to someone else without going through a foreclosure or short sale process.

How Banks Get Involved: Typically, in a "subject to" financing deal, the existing loan stays in the seller's name, but the deed transfers to the buyer, making the buyer responsible for the mortgage payments. It's crucial to note that this does not mean the buyer assumes the loan; the original loan terms and obligations remain with the seller, which includes the debt remaining in their name.

The bank's involvement is minimal in the sense that the loan is not officially transferred. However, there is a significant risk factor here due to the "due on sale" clause found in most mortgage agreements. This clause gives the lender the right to demand full repayment of the loan if the property is transferred without their approval. While it's not common for lenders to invoke this right if payments are being made on time, it is a potential risk that both parties should be aware of.

Does the Buyer Need Their Own Bank? In a "subject to" agreement, the buyer does not typically secure a new loan from their bank to take over the existing mortgage. Instead, they agree to make payments on the existing mortgage under the original terms set by the seller’s bank. However, the buyer might opt to refinance the property under their own name at some point to mitigate the risk of the due on sale clause and to potentially obtain more favorable loan terms.

Would make sure to get the seller to name the buyer (you/your entity) as insured on the property too before closing. Also would consider getting a POA from the seller for their loan so you can communicate make payments on it. It's not always necessary to notify their bank but if you wanted to you could send them a notice saying the payments will be coming from this new name.

It's important for both parties to work with real estate professionals familiar with "subject to" transactions, including real estate attorneys, to ensure that all legalities are properly handled and both parties are protected.

Hope this helps clarify some of your questions!

John O'Leary · Answer

Look into Pace Morby, or Alex Quezada. Both offer great Sub2/Creative finance communities.