What is Subject To?
It means buying subject to the existing mortgage. You write a contract with the owner but the original agreement between the bank and the seller stay in place.
The terms can be whatever are agreed to. For example, you agree to pay the mortgage for 2 years and then pay off the mortgage. In this case, the price is the amount of the mortgage. Or you could agree to pay the mortgage but when you pay off the loan by refinancing or selling, you have agreed to pay another amount besides just the mortgage.
The amount of sale could possibly be below the amount still due on the mortgage and the seller would have to come up with the difference.
Who owns what?
So once the transaction is done, the buyer owns the deed and has control of the house. The mortgage is still in the seller’s name. The buyer has not assumed the mortgage and has no obligations there unless something has been written into the purchase contract. But the mortgage company has no rights over the buyer. If payments are stopped, the only person who will be hurt is the seller. But it is completely unethical to go into a transaction expecting to never pay the mortgage and screwing the seller. This will quickly destroy your reputation. Don’t even think about it.
Due on Sale Clause?
Basically all mortgages have a due on sale clause which says that if ownership changes or other factors change, the bank has the right to call the full amount of the mortgage due. BUT, It is at the bank’s choice. It doesn’t have to call the loan due and if the loan is current and being paid on time, it is unlikely to. Why?
When interest rates on existing mortgages were 6-8% and the going rate for new mortgages was 12-14%, it made sense for the banks to exercise the due on sale clause because they could make more money with a new loan.
And now? Say the existing loan is 6-8% and rates are in the 3-4% range. Why would a bank call a loan that is being paid? In addition, if they have to go through the foreclosure process, they have significant expenses and probably aren’t getting paid anymore.
In addition, because of regulations banks need to keep a certain amount of assets as cash or liquid assets that are easily sold. But they are also able to lend out multiple times their assets. If the reserve requirement is 10%, they can lend out 10 times their assets. So, if they foreclose on a $200,000 loan, that is considered a bad asset and that is $2 million less that they can not loan out and make money on.
Why sell subject to?
People are frequently willing to sell subject to when they need to sell quickly or have a financial problem and are worried about their credit being hurt. There may also be no equity in the property and they want to sell but can’t afford to pay the costs. They may be moving or getting married or divorced or buying another house and need to sell this one quickly.
Frequently the main worry is that the mortgage will be paid. You can explain that you have incentive to pay or you will lose any equity in the house. You can also set up payment through a third party. That way they will know it is getting done and you definitely don’t want to pay them and hope they pay the mortgage. You could set up a joint bank account with autopay to the lender as a solution too. Other than autopay you would want any withdrawals to need both signatures.
Why buy subject to?
It is a no money down way to buy property unless you have to catch up some back payments. You don’t need to qualify for a mortgage and don’t need to come up with a down payment. It is great for investors, people with damaged credit and can’t get a loan but who have cash flow, or young people trying to get into their first house.
How to Make Money?
If the rents in the area are $1200 a month and the mortgage is $1000 a month, you will be making $200 a month. (Put the money aside and don’t spend it in case you need it for repairs.)
What if the rents in the area are $1000 instead? You would have no interest in the deal because you don’t want to just break even, you want a minimum of $200 per month cash flow to be worth it. Some sellers will pay you the $200 per month just to keep their credit from being trashed. It is far better than paying the mortgage of $1000 per month.
If rents are below the mortgage amount it is still possible the seller will pay the difference and your $200/month postive cash flow.
Another way to make money is to spend the money you might have paid on a downpayment in fixing up the property. Then sell the property and make your money that way.
A book that goes into all of this is by Wendy Patton.
The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.