Ever heard someone say they got a “subject-to” offer on their home? Or maybe you or someone you know is contacted with a subject-to offer. Maybe you saw a sign saying “We buy homes!” and wondered what’s going on.
Subject-to is a little-known strategy in the world of deed transactions. It comes in many forms. But the gist of it is this. If the seller does a “subject-to” sale, a buyer agrees to take ownership without having to sign mortgage documents. The purchase is “subject to” the current loan terms. And the buyer takes over the monthly payments.
So, now you’re wondering: Is this offer a good deal or a bad deal?
Let’s take a closer look.
What Making (or Taking) a Subject-To Offer Means
In a subject-to sale, the seller’s mortgage stays right where it is. The deed can still be conveyed in this situation.
Imagine being a homeowner who’s motivated to sell. You get an offer from someone who wants to buy your home with the mortgage on it — discounted. If there’s, say, $80,000 left on the mortgage, then your buyer will need to pay that off — so it’s taken out of the purchase price.
With this agreement, your buyer promises to take over payments on the mortgage loan (whew!), although the loan will stay under your name for the time being.
Now, imagine you keep making your automatic monthly payments. And, by contractual agreement, the buyer of your home repays you every time.
Why This Can Be a Good Deal
The subject-to strategy can be an appealing idea for a borrower who gets into a financial jam and is motivated to sell. But it’s also considered a way to preserve a low interest rate.
Say you, the seller, bought in 2021, and you grabbed an interest rate of 3%. Great job!
Now you’d like to sell, but today’s loans today have an interest rate of 6% or more. You can’t justify moving into a pricier mortgage. Now, it turns out there’s a buyer out there who would happily pay you for a loan that charges under half of the going interest rate. Sure, the buyer could wait until rates drop back down to 3% before buying — but that’s unlikely to happen any time soon.
So, with a subject-to deal, the buyer gets to have the home now, and keep that attractive mortgage no one wants to part with. Both sides feel they made a good, sensible deal.
In fact, there are ways to make this transaction a win for everyone involved — and that can include a real estate agent. Plenty of professionals advertise themselves as open to creative purchase strategies.
Why This Can Be a Bad Deal
The buyer who becomes responsible for paying off a mortgage takes a risk. The lender could send a demand for a full loan payoff — if it notices and objects to the ownership transfer.
Sellers take a risk in this kind of deal, too. There’s obvious risk involved in leaving your debt to someone else to handle. With no new agreement in place between the new homeowner and your mortgage company, what’s forcing that new homeowner to make the payments? The contract between you and the other person, sure. It says: Full payments must be submitted on time. But what if that person stops paying you the monthly amount due? It’s your credit history at stake. And that debt will also be a factor when you apply to get a new mortgage for some other home.
Given the risk, is the subject-to transaction really a good deal? Why would a homeowner with a low interest rate sell the home, when they could build equity by keeping it? Even in cases where it seems there’s no other option, the parties should consult individually with their real estate lawyers or financial advisers to understand if the reward covers the risk.
Tax questions arise, too. For example: If you pay a mortgage that’s in another person’s name, how will you account for tax-deductible interest payments?
Above all, no one wants to be on the hook for debt on a home they no longer have. Your contract must lay out consequences for nonpayment. It must say, for example, that as soon as a payment is late, the transaction converts to a rental agreement until the end of the mortgage. As you can see, a real estate lawyer is necessary to ensure well-drafted contractual language.
Do Mortgage Companies Actually Allow Subject-To Deals?
A lending institution can benefit from a subject-to deal, if it saves a mortgage. Then again, the lender might believe the deal is putting the loan at risk, not saving it. The lender can then point to the mortgage’s acceleration clause (the “due-on sale” clause) that a transfer of the deed triggers (with a few exceptions, as with selling among family members).
What happens if a due-on-sale clause gets triggered? The buyer will suddenly have to pay off the mortgage entirely to keep the property.
Is there a safe way to avert this? Yes. Get the mortgage company to approve the deed conveyance. (There will be administrative charges if the lender vets the buyer, and accepts the ownership change.)
In some subject-to transactions, to avoid strict loan acceleration rules, no one tells the mortgage company about the sale at all. The company simply collects the on-time payments from the original borrower, who’s receiving the funds from the new homeowner.
And the mortgage plays itself out, with the company none the wiser.
Is This Even Legal?
Can you avoid involving the mortgage professionals and stay on the right side of the law? Selling and buying subject-to is legal; the question is whether it’s acceptable under the terms of the mortgage contract. For an agent, it’s whether professional responsibility rules out helping a client breach a contract.
A subject-to transfer of the deed is not the same as a mortgage assumption! VA loans and FHA loans have a built-in allowance for the seller to actually transfer the loan along with the home. This is called assuming the loan, and it means the seller is off the hook officially. Read more about assumable mortgage loans on Deeds.com.
A discussion of ethics codes or lenders’ rights might seem overly formal. After all, our mortgage companies regularly sell our debt off to servicers, who sell these debts again. If rates today are over 6%, and you have a mortgage with a 3% rate, you have a fabulous feature for a buyer who wants your home subject-to. Shouldn’t the parties be free to strike such a bargain?
Fair question. But look at it this way. While subletting your apartment might be a financial win-win, you still look at your contract to know if you’re clear to proceed.
So, a discussion of the formalities isn’t really overkill. If the parties cannot get the lender’s go-ahead on the deal, we’d have to call it a matter for their legal experts.
When Investors Buy Homes Subject to Debt
Some investors buy subject-to homes as a strategy. They seek good deals from desperate homeowners. They make a business out of contacting these prospects — often sending multiple low, subject-to offers a week. You might also run into these dealmakers, along with people offering homes with assumable mortgages, among the real estate services in the classified ads online.
Investor-buyers advertise and also scan public records in order to engage:
- Owners of vacant homes.
- People trying to sell, but whose listings expire.
- Borrowers who’ve defaulted on their mortgages (pre-foreclosure situations).
- Homes in short sales.
- Homes being auctioned.
Some of these investors use real estate agents to keep them apprised of distressed properties. And they rely on loan servicing businesses to manage the debts.
What’s the investor-buyer’s reward? They’re picking up the mortgage loans without paying origination fees or closing costs. Investors (landlords or flippers) expect more profit when bypassing loan intermediaries.
The Subject-To Sale, In a Nutshell
If you heard about subject-to deals before you encountered this article, maybe you wondered:
What motivates people to make subject-to offers? How do these deals really work?
We hope this brief exploration has answered your questions — and raised more. Our aim is to share the basics of subject-to deed transactions, and to help readers understand the point of these offers.
In short: Through “subject-to” deals, some sellers and buyers agree to bypass the process of removing one mortgage and securing a new one. They convey the title to a home — but leave the current loan in place.
Please note. This discussion is neither financial nor legal advice. We post it to offer general knowledge, and a jump-off point from which readers can do their own research. Readers should always check and adhere to their own private contracts, and the laws of their specific jurisdictions.
Supporting References
Elizabeth Weintraub for The Balance: How Subject-To Loans Work in Real Estate (updated May 26, 2022).
And as linked.
More on topics: Assumable mortgage loans, Contract for deed
Photo credits: Kampus Production and Thirdman, via Pexels.