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, takes on all responsibilities of ownership, 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."

HOW DOES THIS AFFECT THE SELLER’S 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. The loan remaining in the seller’s name will likely affect the seller’s debt-to-income (DTI) ratio during the first year following the subject-to transaction. However, using a third party loan servicing company may allow some lenders to remove the loan from the DTI calculation earlier than one year.

WHY WOULD A SELLER DO THIS STYLE OF TRANSACTION?

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 DOES THIS AFFECT THE SELLER’S 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. The loan remaining in the seller’s name will likely affect the seller’s debt-to-income (DTI) ratio during the first year following the subject-to transaction. However, using a third party loan servicing company may allow some lenders to remove the loan from the DTI calculation earlier than one year.

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 THE BUYER MISSES A PAYMENT?

While we've never missed a payment, we take precautions to ensure everyone involved is secured. The title company will provide detailed language about what would happen in the event of missed payments or default by the buyers. If a default occurred, the seller would be able to regain control of the property and benefit from any and all payments we made towards the loan, improvements made to the property, and appreciation in the property's value.

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. Our company will be responsible for all things related to insuring the property and entitled to any claims. We will take the necessary steps to transfer utility services into our name.

HOW LONG WILL THE MORTGAGE REMAIN IN THE SELLER’S NAME?

The short answer would be for as long as possible. 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.

WHAT HAPPENS IF THE DUE-ON-SALE CLAUSE IS CALLED?

This rarely happens, but if the bank sees that the deed has been transferred, they could request that the remaining loan balance be paid in one lump sum. We have several options that we could pursue if this happened including refinancing the property, selling the property, speaking to the lenders directly about the nature of the transaction, transferring the deed back to the seller and initiating an executory contract, and more.