Buying Real Estate “Subject To” an existing mortgage

Taking over a property “Subject To” an existing loan. Doing this is not as hard as it may seem as long as you know what it is and how to execute successfully for all parties involved.

Brief Intro:

When financing a property, you will see that the note says I owe x amount of money and the Deed of Trust or Mortgage says, “here is how the lender proceeds to take over the collateral or sell it if I don’t pay the note as agreed upon.” Generally, how it works is the person borrowing the money is personally liable on the loan, which means that if the collateral that backs the note, once sold, is not enough to cover the debt, the borrower must make up the difference from their other resources.

This is why we suggest that you have “TRUST Setup which protects your assets from forfeiture, seizures, collections and more asset protection that many people lack the inner standing of how it all works when dealing in commerce.

Traditionally, what happens if you don’t get a new loan when you buy a property, you will take over ownership and “assume and agree to pay the loan as was agreed upon.”

However, for many years now, most lenders have had a “due on sale” clause in their collateral agreements. Meaning anytime the original homeowner sells or transfers any interest in the property to someone else, the lien holder may (but does not have to) require full payment of the loan now rather than continue to accept payments.

Earlier years the “due on sale” clause, current interest rates were much higher than the rates on old loans, which meant many lenders had a good reason to call the loans due where the “due on sale” had been violated. Now that interest rates have reached historic lows and interest rates are still low, lenders in general have not been filing “due on sale” cases at all. And, as a rule, unless something out of the ordinary happens, the lender never notices that a transfer has occurred. If you don’t make the payments, they will notice. If you cause them a lot of paper work, they will notice.

Taking a property “subject to” existing mortgage means that you get the deed but you do not assume the loan. The loan stays within the original homeowners name, but you now control the property and make the mortgage payments on it. If you don’t make the payments, you could lose the property and any equity in it. However, if you don’t make the payments and you lose the property, there will be no personal liability beyond the loss of the property.

Typically homeowners who are behind on payments, in foreclosure or have no equity in the home should be motivated sellers so that you can start a new path without ruining your credit.  Whenever your doing a “Subject to” it’s a good idea to know how the process works and be explained how it all works and how sellers can benefit. Sellers will benefit because the buyer will be making the payments on time so it will help the sellers credit.

Subject to while mortgage stays in sellers name
subject to which allows mortgage payments to be paid by buyer to lender

If they are concerned about doing this as a last option to save the home, you risk losing equity.  Within the clause sellers and buyers can agree to pay off the sellers loans within a certain amount of time.

We suggest using an intermediate like a loan servicing company or trust company that can do this for you. Another idea is to have the seller open a savings account at the Savings & Loan that is carrying the loan, and you make the payment into that account and set that account up for auto pay of the loan. This way, the seller can check the account and see that the payment was made and paid out.

The idea has the added advantage of the S & L still seeing a payment come from whoever they were accustomed to seeing it come from.

The biggest problem  we have seen usually comes with insurance. You must have insurance. And the homeowner’s policy is only good for 30 days after the transfer. So, for starters, you should call or write the insurance company that has the existing policy, and ask them to add the seller to the policy.

If you do this, remember to follow up in two weeks and change the policy to a “renters” policy rather than a homeowner’s policy. Or, get a new homeowners policy in both your and the seller’s name. Or just leave the original policy and go get a second policy. But now you have two insurance payments

Another great approach when dealing with insurance on subject to deals is to use a land trust. A land trust holds title to real property and is most commonly used by homeowners for different tax purposes and real estate planning. The homeowner would be the beneficiary and the seller would be the trustee who carries out orders and controls the property. Buyers should write a letter to the lender explaining the change and all correspondence to be directed to the trustee who then changes the policy. To protect the buyers and sellers interest in the property, beneficial interest would also be assigned over to seller.

There is a chance, as interest rates climb in future years, that lenders will be more interested in who is making the payments. Don’t get behind on payments. So those of you who are using “subject to” as a tool, make sure you do everything else by the book and on time both sellers and buyers should be transparent and honest in their business dealings and all parties will always win.

Many sellers are now using “Subject To” To save their homes and their credit by avoiding many pit falls like foreclosure. Always best when in doubt sellers to ask questions. Buyers do good business and you can help save many people from financial disaster. It’s a win win for all. 🙂