What Is Unique About a Subject To Purchase Arrangement?

A “subject to purchase arrangement” is a distinctive approach to real estate transactions. In this non-traditional method, property ownership transfers without the buyer obtaining a new mortgage. Instead, the existing mortgage on the property remains in place.

The Core Mechanism: Existing Mortgage and Liability

The unique aspect of a subject to purchase arrangement is the existing mortgage, which remains in the seller’s name after the property’s title is transferred to the buyer. Unlike a standard real estate transaction where the seller repays their mortgage with sale proceeds, in a subject to deal, the original loan is not paid off. The buyer does not obtain a new loan, avoiding the typical mortgage application process.

The seller retains legal liability for the existing mortgage. Their name remains on the promissory note, making them ultimately responsible to the original lender for the debt. If the buyer fails to make payments, the seller’s credit score would be negatively impacted, and the lender would pursue the seller for repayment, potentially leading to foreclosure. This inherent risk for the seller underscores the importance of trust and clear agreements in such transactions.

The buyer agrees to make payments on this existing mortgage. These payments can be handled in a couple of ways. Often, the buyer makes payments directly to the seller, who then forwards the funds to the mortgage lender. Alternatively, the buyer might pay directly to the lender, with the account remaining under the seller’s name. This direct payment is facilitated by granting the buyer access to the seller’s mortgage account information for payment purposes.

This mechanism allows the buyer to acquire property without the financial hurdles of traditional lending, such as large down payments or stringent credit requirements. For the seller, it offers a way to dispose of a property quickly. The absence of a new loan process can significantly expedite the closing timeline.

Closing costs are typically lower in a subject to transaction compared to a conventional sale. Buyers may avoid fees associated with new loan origination, such as loan application, appraisal, and underwriting charges. However, standard real estate closing costs, like title insurance, escrow fees, and recording fees, still apply. These costs can range from 2% to 5% of the purchase price, depending on the specifics of the transaction and local regulations.

Defining Elements of a Subject To Purchase

A defining characteristic of a subject to arrangement is the transfer of the property deed to the buyer. This transfer occurs at closing, granting the buyer legal ownership of the property while the mortgage debt remains in the seller’s name. This separation of ownership from the mortgage obligation means the buyer holds equitable title and control over the property. The deed used for this transfer is often a Warranty Deed or a Quitclaim Deed, explicitly noting the existing mortgage as an encumbrance.

A “due-on-sale” clause, also known as an alienation clause, is present in most mortgage agreements. This clause grants the lender the right to demand immediate repayment of the entire outstanding mortgage balance if the property is sold or transferred without their consent. In a subject to transaction, transferring the deed without lender approval technically triggers this clause. While lenders do not always enforce it, the risk of the lender “calling the note due” remains. If the lender enforces this clause, the property could face foreclosure.

Property insurance in a subject to deal differs from traditional sales where the buyer obtains a new policy naming their lender. In a subject to arrangement, the original lender still needs protection, as their loan is secured by the property. The seller should not maintain their existing homeowner’s policy, as it may not cover a property no longer occupied by them or protect the new owner’s interests. The buyer should obtain a new non-owner-occupied or landlord policy, listing themselves or their owning entity as the “first named insured.” The original lender should also be listed as a “loss payee” or “additional insured” to protect their interest in the event of a claim, ensuring insurance proceeds cover repairs and satisfy the lender’s interest.

Typical Scenarios for Subject To Arrangements

Subject to purchase arrangements are often considered in specific situations where traditional real estate transactions may not be feasible or desirable.

One scenario involves properties with an existing mortgage that carries a low interest rate. In periods of rising interest rates, a seller might be reluctant to pay off a mortgage with a favorable rate, as a new buyer would likely face significantly higher borrowing costs. A subject to deal allows the buyer to take advantage of the seller’s lower interest rate.

Another application occurs when a buyer faces challenges qualifying for conventional mortgage financing. This could be due to credit history, insufficient income, or inability to provide a large down payment. Buyers can acquire property without the stringent approval process of traditional lenders, reducing the upfront financial commitment.

Subject to arrangements can also be used for properties requiring significant repairs or renovations. Buyers, particularly real estate investors, may seek such properties for quick acquisition and improvement. The expedited closing process allows for faster acquisition, enabling the buyer to begin rehabilitation work sooner. This is appealing for properties that are distressed or would not qualify for conventional mortgages in their current condition.

Finally, subject to transactions are employed when a quick sale is desired by the seller, bypassing delays associated with traditional financing and closing procedures. Sellers needing to sell rapidly due to relocation, financial distress, or to avoid foreclosure find this arrangement advantageous. It provides a mechanism to transfer property ownership, offering a solution for sellers seeking immediate relief from mortgage payments and property responsibilities.