“Subject To” – Owner Financing Made Easy
Subject To: “Subject to existing mortgage staying in place” – this is a clause that is becoming very popular on real estate contracts. But what does it really mean? What are the advantages for both sellers and buyers? How does it work?
When you take over a property using the “subject to” clause, it means that you get the deed/title to the property, but the existing loan stays in the original homeowners’ name. However you now control the property and make the payments on it. Of course if you don’t make the payments, you will lose the property and the seller’s credit will be damaged, since the liability is in his/her name.
But what are the real advantages to the seller and the buyer?
Advantages to the Seller
- Increased number of potential buyers
- Receive the true value of the property
- Does not have to go through a short sale or lose the house to foreclosure
- Can move on or relocate faster than having to sell the property the “usual” way
- Income tax liability from the sale may be be deferred
- The mortgage note may be converted into cash if needed
Advantages for the Buyer
- Will not need to meet rigid bank standards
- Lower closing costs
- Possibly a smaller down payment than with a bank
- May have more flexible payment terms
- Might not have to establish escrow taxes and insurance
“Motivated Sellers” are usually homeowners who are behind on payments, in foreclosure or have no equity in the home. They might actually benefit because you will be making their payments on time so it will help their credit.
If they are concerned about giving up control of their home,
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especially if the sellers are not behind on their payments and have still good credit, it is usually a good idea to offer a step-up deal – the first 6 months as a lease option to buy (where the homeowner still keeps control of the property on title as well) and then once they see that you make payments on time and you are a viable property owner, step it up to a “subject to,” where you will take over the title of the property.
There are also 2 main ways to deal with “subject to” if you are concerned about raising the homeowner comfort level with the transaction:
1.Have a third party (loan servicing company or trust company) collect and disburse the mortgage payments.
2.Another approach when dealing with “subject to” deals is to use a land trust. A land trust holds title to real property and is commonly used by homeowners for tax purposes and estate planning. The homeowner is the beneficiary and the buyer is the trustee who carries out orders and controls the property.
The “due on sale” clause, which most mortgage instruments have specified on their note, and it means that 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.
In the past, when the current interest rates were much higher, 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 there are so many properties in default on the market, 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. So as long as you keep the payments current and the property in good condition, they should not exercise the “due on sale” clause.