What Is a Subject To in Real Estate?

A “subject to” transaction is a method of acquiring real estate where the buyer takes ownership of a property while an existing mortgage remains in place. This approach differs from conventional home sales, where a buyer typically secures new financing or pays cash. It offers an alternative for individuals to acquire real estate, often appealing when traditional financing is challenging. This arrangement influences how the property’s debt is managed after the transfer of ownership.

Defining “Subject To” Transactions

A “subject to” real estate transaction occurs when a buyer acquires a property with an existing mortgage remaining on it. The buyer takes title to the property but does not formally assume the seller’s mortgage loan. The original loan remains in the seller’s name, and their credit continues to be associated with that debt.

The buyer agrees to make payments on the seller’s existing mortgage without being added to the loan documents as a borrower. Ownership of the property transfers to the buyer through a deed, such as a warranty deed or quitclaim deed, which is recorded in public land records. The legal obligation to repay the mortgage debt stays with the original borrower, the seller. The buyer typically provides an initial down payment to the seller.

For instance, if a property has an outstanding mortgage balance of $200,000, the buyer would take title. The $200,000 mortgage would continue in the seller’s name, and the buyer would be responsible for making monthly mortgage payments directly to the lender or to the seller, who then forwards them. This allows the buyer to acquire property without new financing, which can be beneficial for buyers who may not qualify for traditional loans. The buyer’s credit is not directly impacted by the existing mortgage, as they are not the named borrower.

The seller, despite transferring ownership, retains primary liability for the mortgage debt with the lender. The mortgage is secured by the property, but the personal obligation for repayment rests with the original borrower. While the buyer gains control of the property, the seller’s credit score could be affected if the buyer fails to make timely mortgage payments. This arrangement requires trust and a clearly defined agreement between the buyer and seller to manage ongoing financial responsibilities.

Operational Mechanics of “Subject To”

The execution of a “subject to” transaction begins after the buyer and seller agree on terms. The seller transfers the property’s ownership to the buyer through a deed, which is recorded with the county recorder’s office. Despite this transfer, the original mortgage loan remains in the seller’s name, secured by the property.

Following the transfer, the buyer assumes responsibility for making the existing mortgage payments. These payments are typically made directly to the mortgage lender, or the buyer might pay the seller, who then remits the funds. The buyer is responsible for adhering to the original loan’s terms, including principal, interest, and any escrowed amounts for property taxes and insurance.

To facilitate this, the buyer and seller often establish a formal servicing agreement or a promissory note detailing the payment schedule and responsibilities. This written agreement outlines the buyer’s obligation to cover mortgage payments and often includes provisions for late payments or defaults. It serves as a private contract between the parties, separate from the original loan agreement with the lender.

In some cases, an escrow agent or a third-party servicing company may manage the mortgage payments. The buyer sends payments to this third party, who forwards them to the original lender. This adds protection and accountability for both parties. Such services often come with associated fees for managing the payment flow.

The original mortgage lender is generally not a party to this “subject to” agreement. The loan documents remain unchanged. The original lender continues to send mortgage statements to the seller, and any communication regarding the loan will be directed to the seller. The seller needs to communicate these details to the buyer to maintain transparency.

Key Considerations in “Subject To” Agreements

A primary factor in a “subject to” agreement is the “due-on-sale” clause, present in most standard mortgage agreements. This clause allows the lender to demand immediate repayment of the entire outstanding loan balance if the property is sold or transferred without their consent. While lenders rarely enforce this clause if payments are consistently made, its presence means the lender has the option to call the loan due, which could put the buyer and seller in a difficult financial position. The Garn-St. Germain Depository Institutions Act of 1982 generally protects consumers in certain situations, but it does not broadly prohibit due-on-sale clauses in transfers of investment properties or properties where the buyer does not intend to occupy the home.

Property insurance is another consideration. While the buyer takes possession and assumes responsibility for the property, the existing homeowner’s insurance policy is typically still in the seller’s name. The buyer should secure their own property insurance policy, such as a landlord policy or a specific “subject to” policy, to protect their interest. The original policy in the seller’s name may not cover the buyer’s interests or liabilities, especially since the buyer is now the legal owner. This ensures that the property remains adequately insured against damage or loss, protecting the new owner’s investment.

Responsibility for property taxes must be clearly defined within the agreement. Even though the mortgage is in the seller’s name, the legal obligation for property taxes shifts with the transfer of title to the buyer. The agreement should specify how these taxes will be handled, whether the buyer pays them directly or reimburses the seller for amounts paid through the existing mortgage’s escrow.

A comprehensive, written agreement between the buyer and seller is essential for a “subject to” transaction. This document should outline all terms, including:
The purchase price.
Any down payment.
The payment schedule for the existing mortgage.
Responsibility for ongoing costs like property taxes, insurance, and maintenance.
Contingencies, such as what happens if the buyer defaults on payments or if the due-on-sale clause is invoked by the lender.

This formal contract provides clarity and legal recourse for both parties, mitigating potential disputes.