Who builds equity in a subject to deal?

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Who builds equity in a subject to deal?

David Martin
Member since 2021 · 14 posts · 5 votes

Hello! I've been researching subject to deals and was curious about who is building equity in these situations. I understand that the buyer takes the property title but is making payments to the seller's mortgage company since the mortgage is still in the seller's name -- does that mean the seller technically builds equity, or is it just whoever holds the title? If it's the seller who's building equity, at what point does the equity switch to the buyer, if ever?

Also, can someone explain how the seller gets the mortgage off their Debt to Income ratio? I found brief mention that using a mortgage servicing company can remove 75% of the mortgage from the seller's DTI on the buyer's first payment, and 100% after a year of successful payments, but would like to understand this more.

Thanks in advance!

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3y
Quote from @David Martin:

Hello! I've been researching subject to deals and was curious about who is building equity in these situations. I understand that the buyer takes the property title but is making payments to the seller's mortgage company since the mortgage is still in the seller's name -- does that mean the seller technically builds equity, or is it just whoever holds the title? If it's the seller who's building equity, at what point does the equity switch to the buyer, if ever?

Also, can someone explain how the seller gets the mortgage off their Debt to Income ratio? I found brief mention that using a mortgage servicing company can remove 75% of the mortgage from the seller's DTI on the buyer's first payment, and 100% after a year of successful payments, but would like to understand this more.

Thanks in advance!

The buyer benefits from the loan pay-down.  When you sell, your net proceeds will be higher because the balance is lower when paid off at closing.

@Don Konipol answered the loan servicer DTI question perfectly.

Also consider property insurance.  Since the most common way mortgage co's discover  a change in ownership is from the insurance policy changing, just have yourself added as additionally insured.  

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    3y
    Quote from @David Martin:

    Hello! I've been researching subject to deals and was curious about who is building equity in these situations. I understand that the buyer takes the property title but is making payments to the seller's mortgage company since the mortgage is still in the seller's name -- does that mean the seller technically builds equity, or is it just whoever holds the title? If it's the seller who's building equity, at what point does the equity switch to the buyer, if ever?

    Also, can someone explain how the seller gets the mortgage off their Debt to Income ratio? I found brief mention that using a mortgage servicing company can remove 75% of the mortgage from the seller's DTI on the buyer's first payment, and 100% after a year of successful payments, but would like to understand this more.

    Thanks in advance!

    1. Equity = Value - Debt.  The OWNER of the property receives the proceeds at sale, so he’s the one benefiting from any increase in value and any loan pay down.  
    2. A mortgage servicer can provide records showing that the property owner is making payments to the servicer who then makes the payments to the lender.  This, combined with the sale closing documents will provide proof that the seller is no longer making the mortgage payments on the subject property.  However, he still retains liability on the mortgage.  So as a compromise a new lender will accept 75% of the mortgage payment as an income offset to the monthly mortgage payment.  
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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    3y
    Quote from @David Martin:

    Hello! I've been researching subject to deals and was curious about who is building equity in these situations. I understand that the buyer takes the property title but is making payments to the seller's mortgage company since the mortgage is still in the seller's name -- does that mean the seller technically builds equity, or is it just whoever holds the title? If it's the seller who's building equity, at what point does the equity switch to the buyer, if ever?

    Also, can someone explain how the seller gets the mortgage off their Debt to Income ratio? I found brief mention that using a mortgage servicing company can remove 75% of the mortgage from the seller's DTI on the buyer's first payment, and 100% after a year of successful payments, but would like to understand this more.

    Thanks in advance!

    The buyer benefits from the loan pay-down.  When you sell, your net proceeds will be higher because the balance is lower when paid off at closing.

    @Don Konipol answered the loan servicer DTI question perfectly.

    Also consider property insurance.  Since the most common way mortgage co's discover  a change in ownership is from the insurance policy changing, just have yourself added as additionally insured.  

    4Reply
  • John M.
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 796 votes
    3y

    What happens when the bank finds out that the deed has been transferred to the new buyer.  Do they call in the loan? (due on sale clause), Don't care, or do you switch the deed back to the seller in that case.  I.E. what is the back up plan for the buyer when this happens.

    0Reply
  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    The buyer builds the equity and the seller takes whatever was agreed upon in the contract. 

    0Reply
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