Acquiring real estate “Subject To” is an investment strategy that allows investors to acquire a property with little or no money out of pocket by leaving the seller’s existing mortgage in place. More simply, the investor does not have to get a loan through a bank or hard money lender to buy the property because they have purchased the property “subject to” the existing loan or loans. Put another way, “subject to” is a way to control a property by having the seller of that property continue to hold their bank financing in their name, but give the interest, benefits, and responsibility of the property to the investor. Because the seller’s name remains on the loan they will still remain liable for the payments if they were not made by the buyer.
Could the lender call the loan due if the property is sold subject-to?
Technically yes, but practically no. Whenever a home is sold, the underlying lender technically has the right to “call the loan due”. This is known as the “due on sale clause.” Almost all home loans that are less than 25 years old will have a “due on sale clause.” That being said, we have never seen a case in which a lender actually calls a loan in which the loan payments are being made in a timely manner. Banks are in the business of loaning money and collecting money, not in the business of managing property. Additionally, the lender would have to do their due diligence in order to even know that a sale took place, and why would they do that on a well performing loan? Finally, there are some strategies that investors use to further disguise a subject to sale, however, it is debatable whether these strategies are necessary.
Can a property be sold subject to when payments have been missed?
Yes, in some cases if there is a substantial amount of equity in the home, an investor or buyer may be willing to make up the back payments and buy the property subject to.
How will selling subject to affect the seller’s credit?
Most of the time there will be no affect on the seller’s credit in a subject to deal. However, if the seller has missed payments in the past and then an investor or buyer makes up those missed payments and pays on time from that moment on, it can actually improve the seller’s credit score. On the flip side, if the seller were to sell their home subject to the existing financing to a buyer that is not able to make the payments on time, the seller’s credit could then be damaged.
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