Making an offer “subject to the existing mortgage" is one of the best ways to buy a home if you can't qualify for a new mortgage loan. Simply put, a buyer and seller agree that the seller will allow the buyer to take over the seller's mortgage payment. Usually done for a period of one, two or three years, this allows a buyer to avoid qualifying for a purchase mortgage. It also may allow a seller to sell faster, when there is a strong need to do so.
This is a popular technique among real estate investors, but may also make sense for end-user buyers who wish to occupy the property. At closing, the property is titled in the buyers name, but the mortgage loan is still in the sellers name. Therefore, you are buying the property “subject-to” the sellers existing mortgage payments.
What are the advantages of purchasing a home this way?
The biggest advantage is that you are buying without the need to qualify for a new loan. When you purchase a property “subject-to” the existing mortgage, the seller is agreeing to allow you to take possession of their property, and pay their existing mortgage payments. Since you are not qualifying for a new loan, and the existing loan is in the sellers name, it is the sellers credit that is at risk, instead of the buyer. This means that a buyer can buy the property without having to worry about having good credit.
Why would a seller agree to let someone else make their payments?
There is definitely some risk involved for a seller who agrees to sell a property “subject-to” the existing mortgage. If the buyer fails to make the mortgage payments, the seller is the one who will suffer. A seller’s credit could be ruined by a buyer who fails to make the mortgage payments on time. Therefore a seller may be reluctant to agree to “subject-to” terms unless they are motivated to do so. But these days, there are more "motivated sellers" than ever.
There is usually some extreme circumstance or personal issue that is forcing the seller to do something they might not ordinarily do. But in today’s market, with so much competition on the selling side, it’s easier than ever to find sellers who are motivated to do whatever it takes to sell their property.
I once did a “subject-to” transaction with a seller who was getting married and moving out of state. She had been trying to sell her property for several months, with no takers. It was in a great area, in a nicer neighborhood, but the house needed some updating and the colors were rather drab inside.
Time was running out. The wedding was only weeks away, and the seller was planning to take up residence with her new husband in his house. Because of this she was motivated to sell the property any way she could. She accepted an offer to buy her property subject-to the existing mortgage, for two years. That meant that we had two years to get new financing and pay off her existing mortgage. In my case, I was using the subject-to strategy to buy an investment property, but this is a great strategy for an owner occupant buying a home to live in.
The “subject-to” arrangement allowed the seller to solve her immediate problem. It also allowed us to buy the property without having to qualify for a new loan. Everyone was happy.
Subject-to offers can be a great solution for those who are self-employed and newly employed.
Got a good income from your business or job, but can't qualify for a mortgage due to issues like "less than 2 years on the job", or not showing enough income on your tax return? "Subject to" could be your ticket to home ownership.
When writing “subject-to” offers, you need to have the seller provide you with a copy of the current mortgage terms. You will want to include these terms in your offer, so that they are spelled out to the letter.
“Offer price $97,780 dollars, subject-to existing mortgage payoff of $95,780, with payments of $789 per month, principal and interest, (the seller’s current payment), for 24 months. After 24 months, buyer will obtain new financing and payoff existing mortgage balance. Buyer also agrees to pay seller $2,000 cash down payment at closing”.
So we are going to carry this note for up to two years, and when we either sell or get new financing, we will pay off the sellers existing loan, and we will pay the seller $2,000 in cash, which helped the seller meet their immediate needs.
You can put in any terms you and the seller agree to. It just depends on the situation and the level of seller motivation. Just keep it legal and moral. You can’t enforce terms in a contract that are in violation of existing laws, or attempt to circumvent legal procedures that are required by law.
If the seller’s payment also includes an amount for taxes and insurance, you would want to specify that too. You want to be sure you clearly document the exact terms of the existing mortgage. You will usually need your own insurance in your name, since you are the title holder of record, even if the mortgage is in the sellers name. Discuss this with your closing attorney or title company. to be sure you handle this correctly.
The payment and interest rate are taken directly from the sellers existing loan terms. You are merely documenting those terms in the offer, so that you are clear on how much you are paying each month. If there are additional arrangements, such as a second mortgage, or other terms you and the seller agree to, you should make sure that they are also clearly documented in the offer.
Writing a good offer is really just a matter of making sure every specific detail of your agreement is stated in terms that are clear to both parties. Should you ever wind up in court over contract, a crucial issue will be the clarity of the terms in the agreement.
You may want to have your attorney review the terms of an offer before you and the seller sign it, to insure things are correctly stated. It is pretty basic stuff, but if you need advice, get it BEFORE the seller accepts your offer. Don’t risk making a mistake if you are not sure how to word your offer. This article is not intended to be a substitute for legal advice.
Closing a subject-to transaction is basically like closing any other. Discuss the details with your real estate attorney or title company.
There is a long standing argument about whether “subject-to” transactions trigger the “due on sale” clause commonly found in virtually all mortgages these days. The due-on-sale clause says that the lender can call the loan due if they find that the title of the property has changed hands without their knowledge and consent.
There are many people on both sides of this argument, but to be honest, this is a change of title without the lenders direct knowledge, and in my opinion, this does give the lender the right to invoke the due on sale clause. However, this rarely happens where the payments are current. At the end of the day, lenders just want their money, not the house itself.
And finally, once in the property as an owner, it's usually easier to qualify to refinance. Stay within your budget, make the payments on time and you should have a seamless, "no qualifying" home purchase with very little hassle. ***
About the author: Donna S. Robinson is an Atlanta native, 18 year veteran of the real estate industry and residential real estate market expert. She is the author of "Real Estate Investing Fundamentals & Strategies". Follow her on twitter @donnaconsults Watch her videos here. read more articles and contact her about real estate business consulting services on her website.