What Is a Subject To Deal in Real Estate?

A “subject to” real estate transaction allows a property to be transferred from a seller to a buyer while the seller’s existing mortgage remains in place. In this arrangement, the buyer takes ownership of the property but does not formally assume the existing loan. Instead, the buyer agrees to make the mortgage payments directly to the lender or to the seller, who then forwards them to the lender. This method offers an alternative to traditional financing by enabling the transfer of property without requiring the buyer to secure a new mortgage. The buyer acknowledges and agrees to the debt without becoming personally liable for it.

Defining Subject To Transactions

A “subject to” transaction fundamentally alters how property ownership and mortgage obligations are handled. The property’s title is legally transferred to the buyer, often through a deed, establishing the buyer as the new owner. However, the original mortgage loan remains in the seller’s name, meaning the seller continues to be the party legally obligated to the lender for the debt. The buyer typically agrees to make the monthly mortgage payments as part of the purchase agreement, either directly to the mortgage servicer or by reimbursing the seller.

This transaction differs significantly from other real estate financing methods. Unlike a loan assumption, where the buyer formally takes over the seller’s mortgage and becomes legally responsible for the debt, a “subject to” deal keeps the original borrower (the seller) on the hook. It also stands apart from refinancing, which involves securing an entirely new loan to pay off the old one, or an all-cash purchase, where no financing is involved. The core distinction lies in the mortgage liability: the buyer acquires the property’s equity and responsibility for payments, but the seller retains the primary legal obligation to the lender, making this a non-recourse arrangement for the buyer regarding the existing loan.

Key Information for Buyers

Buyers considering a “subject to” arrangement must thoroughly investigate the existing mortgage and the property. It is essential to obtain precise details about the current loan, including the outstanding balance, interest rate, and monthly payment amount, which typically includes principal, interest, taxes, and insurance (PITI). Understanding the remaining loan term and whether the mortgage is fixed-rate or adjustable-rate is also important for predicting future payment stability. Buyers should verify any escrow account details, such as the current balance and how property taxes and insurance premiums are handled.

Before committing to the transaction, a comprehensive property inspection is important to uncover any structural issues, necessary repairs, or deferred maintenance. Concurrently, a thorough title search must be conducted to identify any existing liens, encumbrances, or judgments against the property. Buyers must arrange for new hazard insurance coverage in their name, even though the mortgage remains in the seller’s name. Understanding the “due-on-sale” clause is important for buyers, as this clause allows the lender to demand full repayment of the loan upon transfer of ownership, though lenders do not always enforce it.

Key Information for Sellers

Sellers entering into a “subject to” transaction must recognize their continued legal liability for the existing mortgage debt. Even after the property’s title is transferred to the buyer, the original loan remains in the seller’s name, and the seller’s credit will be impacted by any late or missed payments made by the buyer. Sellers should understand the “due-on-sale” clause. This clause grants the lender the right to accelerate the loan and demand full repayment if the property is sold or transferred without their consent, posing a potential risk of foreclosure if the lender chooses to enforce it.

Establishing clear agreements regarding payment collection and forwarding is essential to ensure timely mortgage payments. Sellers should specify how and when they will receive funds from the buyer or how the buyer will directly pay the servicer. Maintaining adequate property insurance is important, as the seller remains the named insured on the mortgage, even if the buyer is responsible for the premiums. Sellers must thoroughly assess the buyer’s financial capacity and reliability to make consistent payments, as a buyer’s default directly impacts the seller’s credit score and financial standing.

Documenting the Transaction

Formalizing a “subject to” real estate transaction requires specific legal documents. The transfer of property ownership is typically accomplished through a deed, such as a quitclaim deed or a warranty deed, which conveys the property’s title from the seller to the buyer. A quitclaim deed transfers whatever interest the seller has without guaranteeing clear title, while a warranty deed offers greater protection by warranting the title against defects. This deed is recorded with the county recorder’s office to provide public notice of the ownership change.

Beyond the deed, separate agreements between the buyer and seller are essential to outline the specifics of the “subject to” arrangement. These agreements often include a promissory note, detailing the buyer’s promise to pay the existing mortgage, and a purchase agreement that specifies terms such as the purchase price, payment schedule for the existing mortgage, and responsibilities for property taxes and insurance. This agreement should clearly define how the buyer will handle the existing mortgage payments, whether directly to the lender or through the seller. A memorandum of agreement, though not always required, can be recorded to provide public notice of the “subject to” arrangement and the buyer’s equitable interest in the property.