WHAT IS A ‘SUBJECT-TO’ SALE?

Ordinarily, when a homeowner sells a property, any outstanding mortgage balance gets paid off. If the buyer needs a loan to purchase the house, the buyer obtains a mortgage that has nothing to do with the seller’s loan.

In a “subject-to” sale, the buyer takes over the seller’s existing mortgage and begins making payments. The parties don’t notify the lender that the property has been sold.

Benefits of a ‘Subject-To’ Transaction

If a buyer can’t get a mortgage with a competitive interest rate and the seller has an existing loan with a low rate, buying a property “subject-to” can be an attractive option. A lower interest rate can lead to much more affordable monthly payments. In addition, the buyer can avoid closing costs, which are typically several thousand dollars.

Having the buyer take over the seller’s loan can also speed up the process and help the parties avoid any delays associated with financing. A quick transaction can be advantageous for one or both parties.

Risks of Selling a Home ‘Subject-To’

A “subject-to” sale can be risky for both the buyer and the seller. Some lenders don’t care who makes mortgage payments, as long as they receive the money that they’re owed every month. Other lenders, however, require a mortgage balance to be paid off when a property changes hands.

If the two parties agree that the buyer will take over the seller’s loan payments but don’t get approval from the lender, then the lender finds out, the buyer can suddenly be expected to pay a huge sum of money. If the buyer can’t pay off the loan, the lender can start foreclosure proceedings. That can damage the seller’s credit, since the mortgage is still in the seller’s name.

Because there is no official arrangement with the lender and the loan is in the seller’s name, the buyer is not legally obligated to pay the mortgage. If the buyer doesn’t make payments, the property can go into foreclosure, but the seller’s credit will be impacted since the seller’s name is on the loan.

If the seller declares bankruptcy after selling a house “subject-to,” that can put the buyer at risk. Obtaining insurance on a home that has been sold “subject-to” can also be complicated.

Reasons to Consider a Loan Assumption

A loan assumption is a process that allows a buyer to formally assume a seller’s mortgage. The buyer has to get approval, as with any other type of mortgage. The buyer also has to pay a fee, although it’s less than the fees that buyers typically pay when taking out a new home loan.

A loan assumption can allow both parties to avoid the risks associated with a “subject-to” sale. It’s an option with some government-backed loans, but not with most conventional mortgages.