Another technique to sell a property quickly is to sell the property “Subject-To” the existing financing. This is a variation of owner financing (see wrap-around mortgage), however, in this transaction the seller deeds the property to the buyer, who in turn makes the payments on the loan directly to the lender going forward. After the new buyer purchases the home at the title company, the seller is no longer involved with the property. This is functionally similar to a loan assumption; however, technically, it’s not an assumption, because the seller’s name is still on the loan. Note: virtually no loans in recent years are legally assumable.
- Home value: $200,000
- Existing loan amount: $180,000
- Cost of sales: $15,000 (typical for this value of home)
- Sales price: $190,000
Normally, this home would have to be sold for $205,000 or more to pay off the loan and cost of sales. Selling subject-to, enables the owner to sell the home to a buyer for $190,000 with no closing costs other than title insurance and small fees paid by the buyer.
The benefits to selling a home subject-to are that the buyer does not need to qualify for a loan, pay for appraisals, origination fees, or loan applications. These savings make the transaction more affordable.
The disadvantage to selling subject-to is that the loan is technically still in the name of the seller. In other words, if the buyer defaulted on the loan, it would affect the seller’s credit. Therefore, if you are a seller, selling a property subject-to, you will want to make sure the buyer has strong financial credentials, and is buying the property using this technique to save money, and not because they cannot afford a conventional loan.
Questions About Subject-To
Can 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”. Almost all notes have a “due on sales” clause in them that give lenders this right. 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. Logically speaking – it would not make sense for them to do so. Additionally, it would take the lender some effort and research in order to even know that a sale took place. Finally, there are some strategies to further disguise the 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 the home is worth more than the loan and cost of sales, the 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?
Usually not at all, but it depends. If the seller has missed payments in the past and then a buyer makes up the missed payments and pays on time going forward, it will actually IMPROVE the seller’s credit score. If, on the other hand, the seller sells to a buyer that is not able to make the payments on time going forward, it can hurt the seller’s credit.