Selling a property that was acquired subject to

[Brandon Poole]

Hello,

I am new to real estate investing and I have been learning about creative financing. A question that I have is, once you have  acquired a home via subject to, what does it look like if you want to sell the home? Are you able to sell the property to someone who is financing with a conventional loan? Any input on if this is possible and what it would look like would be great!  

[Mike Hern]

Quote from @Brandon Poole:

Hello,

I am new to real estate investing and I have been learning about creative financing. A question that I have is, once you have  acquired a home via subject to, what does it look like if you want to sell the home? Are you able to sell the property to someone who is financing with a conventional loan? Any input on if this is possible and what it would look like would be great!  

If you have legally changed title to your name (it has nothing to do with how it was financed) you are allowed to sell the property. Some lenders have seasoning requirements if a transaction looks "fishy" but any legit transfer of ownership will close, eventually.

[Eliott Elias]

If you are selling to a conventional or cash buyer, you are going to want to make sure that the purchase price is more than the entire payoff. You can sell the property via owner finance and wrap the loan as well.

[Jonathan Aversano]

If done properly with a title company, you should be able to sell as the only change was to the title, not the underlying financing.

[David Ramirez]

Yes, is just like a regular transaction where the loan is paid off at closing. Remember that the loan is the first lien on the property so the selling price has to cover the loan payoff. 

[Scott E.]

Great question.

As others have said, you wont have any problems as long as the paperwork was all done appropriately when you bought, and as long as the sales price is enough to cover your debt.

But where I see you running into an issue is that in order to convince a seller to sell you their home subject-to, it is highly likely you will be paying at or above retail for the home. Meaning if you try to sell within the first couple of years, you probably won't have enough equity to cover the debt, commissions, and closing costs.

[Jose Garcia]

Hey guys, quick questions in regards to subject to deals (never done one before so I have no experience going through a transaction). In a subject to deal, you are taking over payments for some one else so I am assuming the mortgage is still under the original owners name. What happens when that person wants to go get another mortgage on another property they would want to purchase?

[Caroline Gerardo]

@Jose Garcia the existing loan is a hit to their debt to income ratio as they remain fully responsible to repay the note, though they may own nothing. 

[Mike Hern]

Quote from @Jose Garcia:

Hey guys, quick questions in regards to subject to deals (never done one before so I have no experience going through a transaction). In a subject to deal, you are taking over payments for some one else so I am assuming the mortgage is still under the original owners name. What happens when that person wants to go get another mortgage on another property they would want to purchase?

With Subject To, as compared to assumption, the debt is still in their name, they still owe the money, the lender can foreclose and the foreclosure would be against the borrower (in this case the seller, the original owner). The loan does not show on the buyer's credit.

Their credit still shows the loan, so any late payments destroy their credit. If they want to get another loan, some lenders will credit 80% of the payment that is being paid toward their debt to income level. Sometimes lenders want to see 6 months of payments before they will do another loan but others don't care.

It's a case by case basis depending on the type of loan, how old the Subject To is, the ability to pay of the original owner and the banks guidelines.

[Jose Garcia]

Quote from @Caroline Gerardo:

@Jose Garcia the existing loan is a hit to their debt to income ratio as they remain fully responsible to repay the note, though they may own nothing. 

 Thank you so much for your response,

Follow up question. Aside from affecting the debt to income ratio, would they still be able to qualify for another mortgage through FHA or VA loans. Or would they have to purchase their next property with a conventional loan.

I have some acquaintances that have VA loans and have expressed some interest in selling. Just wanted to get more info on subject to before bringing anything to them.

[Brandon Poole]

Thank you all for your responses and insight, very helpful!  

[Caroline Gerardo]

@Jose Garcia VA the answer is sadly probably no they already used their eligibility so the house must be refinanced or sold.

FHA maybe if more than a year passed and they have say much more income than when they did the first loan. They must carry the whole PITI and HOA on their top ratio. Typically this does not work. Say the combined debt to income ratio was 48 when that loan was done and they haven't doubled or tripled their income the original loan must be refinanced or house sold. This is super problematic when they got a 3.5% rate and now it's 6.875% so the person they cosigned for also has probably not double or tripled their income to refinance at higher rate.

Thing to do is to look at their income and all the debts on the credit report to plan some type of exit. 

This cosigning often  is for a family member and they have no written agreement about refinancing or selling, difficult. Happy to give advice to anyone who wants to call and just talk about the numbers. Then they need to convince the family member to sell or to try to refinance.

[Mike Hern]

Quote from @Jose Garcia:

Quote from @Caroline Gerardo:

@Jose Garcia the existing loan is a hit to their debt to income ratio as they remain fully responsible to repay the note, though they may own nothing. 

 Thank you so much for your response,

Follow up question. Aside from affecting the debt to income ratio, would they still be able to qualify for another mortgage through FHA or VA loans. Or would they have to purchase their next property with a conventional loan.

I have some acquaintances that have VA loans and have expressed some interest in selling. Just wanted to get more info on subject to before bringing anything to them.

It depends. A veteran is given a maximum award amount for VA loans. I've worked with veterans who have two VA loans. The numbers have to work, credit and income come into play, but it is done all the time.

"For the most part, FHA loans are restricted to buyers who intend to use the home that they purchase as a primary residence. This means that an FHA loan cannot be used to finance a second home, a rental home, a vacation home, or an investment property. However, there are a few exceptions and a few ways to get around this general rule."

[Dave Skow]

@Brandon Poole- thanks -  yes...this is possibly OK ...if a buyer is using a conv loan - the lender will require an appraisal report ..if there are issues that the appraiser calls out on the  report- the lender  will more than likely require these  issues are  repaired before the loan/ transaction can close 

[Daniel Lopez]

Quote from @Jose Garcia:

Hey guys, quick questions in regards to subject to deals (never done one before so I have no experience going through a transaction). In a subject to deal, you are taking over payments for some one else so I am assuming the mortgage is still under the original owners name. What happens when that person wants to go get another mortgage on another property they would want to purchase?

 Hey Jose,

so I am very new and haven't even done my first deal just to throw that out there first, so I will simply recommend to speak with someone who is experienced in subject to/creative financing, but my 2 cents is I've been doing alot of research, especially on Pace Morby and creative financing and the way he explains it is yes, they would be able to purchase another property as long as their subject to deal was filed properly and proof that loan is being serviced by a third party. If I am completely wrong I welcome all feedback and education as I am a newbie, but as interest rates are getting higher and higher it just makes sense to dive/or my case start/ with creative financing/subject to.