Frequently Asked Questions
Commonly-asked questions that you, your agent or seller may have about selling using the Subject To method
What is Subject To?
“Subject-To” is a way of purchasing/transferring real estate where the buyer takes title to the property, and the existing loan stays in the name of the seller. In other words, the sale is completed, “Subject To,” the existing financing. The buyer now controls the property and makes the mortgage payments on the seller’s existing mortgage.
Is Subject To legal?
Yes. Fill-able HUD-1 This is a standard form that title/escrow companies and attorneys use to build settling statements. Please note lines 203 and 503. Note this is a Code of Federal Regulation (CFR) document. Page 396, second paragraph states: “Line 203 is used for cases in which the Borrower is assuming or taking title subject to an existing loan or lien on the property.”
Why would any seller do this?
Sellers may consider utilizing the Subject To method in low equity situations as it allows them to relinquish ownership of the property without the need for additional funds or having to write a check at closing. Depending on the seller’s mortgage balance, this method may result in greater financial gain for the seller compared to a traditional sale. Additionally, it enables the seller to move on from the property as they are no longer responsible for expenses such as repairs, maintenance, utilities, taxes, insurance, and HOA fees. The seller’s credit score may improve as a result of timely payments made towards the mortgage.
How can the seller verify that payments are being made?
The buyer engages the services of a third-party loan servicing company, which is responsible for facilitating the monthly mortgage payments. Additionally, the sellers have the option to elect to receive notifications on a monthly basis, indicating that the mortgage payments have been fulfilled.
What happens if you miss a payment?
In the event of a default by the buyer, a pre-signed Deed in Lieu held by the servicing company would be utilized, thereby transferring the property back to the seller’s possession. The seller would then benefit from any payments made towards the loan, improvements made to the property, and appreciation in the property’s value. They may then choose to sell the property again for a higher value if desired. This strategy has been reported as advantageous by previous sellers, and they have expressed a desire for a default to occur.
How are utilities and insurance handled?
Our insurance agent will be responsible for replacing your current policy with our policy, which includes the addition of the sellers as additional insured parties. This will not only ensure our coverage under the policy, but also provide coverage for the sellers. We will take the necessary steps to transfer utility services into our name.
How long do you plan on keeping the mortgage in the seller’s name?
The short answer would be for as long as we can keep it. We advise sellers and agents to anticipate maintaining their name on the mortgage until the mortgage balance is fully settled. However, as per my partners and I, the typical holding period is around 7-10 years.
How does this affect my credit?
As the loan remains in the name of the seller, timely payments made to the lender will be reported to the credit bureau, positively impacting the seller’s credit score. This can be advantageous for the seller.