What Is Subto in Real Estate and How Does It Work?

“Subject-to” real estate refers to a transaction where a property is sold with an existing mortgage. The buyer takes over making payments on the seller’s current mortgage, rather than obtaining a new loan or formally assuming the existing one. While the buyer gains ownership, the original mortgage loan remains in the seller’s name and credit history. This arrangement differs from a traditional sale where the seller typically pays off the mortgage at closing, or a formal loan assumption.

How a Subject-To Transaction Operates

A “subject-to” transaction involves the buyer making payments directly on the seller’s existing mortgage. The loan remains legally tied to the seller, with their name and credit still associated with the debt. The property’s deed is transferred to the buyer, granting ownership rights, though the mortgage lien remains attached.

The buyer provides the seller with compensation for any equity, often as a down payment. Following the deed transfer, the buyer becomes responsible for all ongoing property expenses, including monthly mortgage payments, property taxes, and insurance (PITI). Payments are sent directly to the original lender or through a third-party servicing company. The seller’s primary concern is ensuring the buyer consistently makes these payments, as missed payments negatively impact the seller’s credit and could lead to foreclosure.

Key Components of a Subject-To Agreement

A comprehensive written contract is fundamental to a “subject-to” real estate transaction, outlining the terms between the buyer and seller. This agreement specifies the purchase price, which often reflects the existing mortgage balance and any additional equity compensation. A crucial provision details the buyer’s responsibility for the existing mortgage payments, including principal, interest, property taxes, and insurance.

The agreement also addresses responsibilities for property maintenance and necessary repairs. Clauses addressing potential default by the buyer are common, outlining remedies available to the seller if payments are missed or other terms are breached. The contract typically outlines how the property deed will be conveyed to the buyer, usually through a quitclaim or warranty deed, while acknowledging the existing mortgage lien.

The Original Lender’s Position

In a “subject-to” real estate transaction, the original mortgage lender is generally not a direct participant. Most mortgage contracts contain a “due-on-sale” clause, also known as an “alienation clause.” This clause stipulates that if the mortgaged property is sold or its ownership is transferred without the lender’s consent, the entire outstanding loan balance becomes immediately due. This clause protects lenders by allowing them to demand full repayment if the property changes hands, preventing an unvetted borrower from taking over the loan.

While the deed transfers to the buyer, the original mortgage remains in the seller’s name, which can potentially trigger this clause. Lenders have the contractual right to enforce this clause, meaning they could demand immediate payment. However, lenders often choose not to accelerate the loan if payments continue to be made consistently and on time. The presence of the due-on-sale clause means the lender always retains the option to call the loan due, creating a potential risk for both the buyer and the seller.