What Is a Subject-To Real Estate Deal?

A “subject-to” real estate deal involves acquiring a property where the buyer takes over the mortgage payments, but the existing mortgage loan remains in the seller’s name. This arrangement means the buyer does not formally assume the loan with the lender.

Defining “Subject-To” Real Estate

In a “subject-to” real estate transaction, the buyer obtains ownership of the property, yet the mortgage loan tied to that property stays under the original seller’s name. This differs significantly from a traditional home sale where the seller typically uses the proceeds to pay off the existing mortgage. The buyer in a “subject-to” deal does not go through the lender’s qualification process to take over the mortgage liability directly. The original loan terms, including the interest rate and payment schedule, generally remain unchanged for the duration of the loan. The buyer simply agrees to make the existing mortgage payments.

In a mortgage assumption, the buyer formally takes on the existing mortgage and becomes legally responsible for the debt. Conversely, with a “subject-to” deal, the original borrower, the seller, retains legal liability for the mortgage to the lender. The property deed is transferred to the buyer, but the mortgage lien remains on the property.

Structural Elements of a Subject-To Agreement

The arrangement begins with the transfer of the property deed from the seller to the buyer, which grants the buyer legal ownership. This deed is typically recorded, formally changing the ownership records. While the deed transfers, the original mortgage loan remains in place.

The buyer agrees to make the mortgage payments, which can be handled in a few ways. Payments might be sent directly to the mortgage servicer, or the buyer might remit payments to the seller, who then forwards them to the lender. Some agreements may involve a third-party debt servicing company to manage these payments. Property insurance is also a significant element, as maintaining coverage is required by the lender. The original lender typically remains listed as a mortgagee on the insurance policy to protect their interest.

Existing escrow accounts, which hold funds for property taxes and insurance premiums, must also be addressed. These accounts are usually managed by the mortgage lender to ensure timely payment of these recurring expenses. The buyer and seller must establish how these funds will be managed or adjusted at the time of the transaction. Financial adjustments for prorated property taxes or homeowners association (HOA) fees are also typically calculated and settled at closing.

The Transaction Process for Subject-To Deals

The process for a “subject-to” real estate deal begins with the buyer and seller reaching a mutual understanding of the terms. This initial agreement outlines the fundamental aspects of the transaction.

Following the initial agreement, the buyer undertakes a comprehensive due diligence period. This involves a thorough review of the existing mortgage terms, including the loan balance, payment history, and any associated liens. The buyer also inspects the property’s condition and evaluates its overall financial viability.

After due diligence, the necessary legal documents are drafted. These typically include the purchase agreement, the deed to transfer ownership, and sometimes a separate promissory note or power of attorney that formalizes the buyer’s commitment to make the mortgage payments. The transaction culminates in the closing, where the deed is formally transferred and recorded, and all financial adjustments are settled. While a traditional closing agent or title company may be involved to ensure proper recordation, the closing differs from a standard sale because the existing loan is not paid off.

Ongoing Mortgage Responsibility

After a “subject-to” deal closes, the original seller remains legally responsible for the mortgage to the lender. The buyer, now the property owner, manages the mortgage payments. These payments might be sent directly to the loan servicer or routed through the seller, depending on the agreed-upon arrangement.

Official communications from the mortgage lender, such as monthly statements and important notices, will continue to be sent to the original borrower, the seller. The payment activity on the mortgage continues to be reported on the seller’s credit history. Regular, on-time payments by the buyer can positively influence the seller’s credit score, while any missed payments would negatively impact it. As the new owner, the buyer assumes responsibility for the property’s general maintenance, repairs, and other continuing expenses, such as utility bills and property taxes.