Selling a house “subject to” means transferring ownership of the house, but not the loan. This works by transferring title to the buyer and then having the buyer make payments on the seller’s existing mortgage. Thus, the sale is “subject to” the existing mortgage.
Benefits
The main advantage of a “subject to” sale is that because the buyer makes payments on the existing mortgage, the seller does not need to pay it off. If the house is underwater (i.e., it is worth less than the mortgage balance) but the seller still needs to sell, this can save them from having to come up with a substantial amount of cash to satisfy the mortgage balance (see our Underwater Mortgage Savings Calculator to estimate how much this might be). In this scenario, the seller is actually selling the house for more than it is worth.
The benefit to the buyer is that they may be able to get an interest rate that is lower than what is currently available, such as if the seller’s mortgage has an interest rate of 3% and current rates are 6%.
Since the buyer doesn’t need to go through the traditional mortgage approval process, the transaction can go a lot faster and have lower closing costs.
When the buyer makes payments on the seller’s existing mortgage, the seller will have a performing loan in their name. This can help improve the seller’s credit. The buyer can use a servicing company to make payments on the existing mortgage. If the seller then needs to obtain a new loan, the servicing company will be able to provide proof to the seller’s new mortgage lender that the existing mortgage is being satisfied, thus removing the existing mortgage from the seller’s debt-to-income ratio.
Drawbacks
The main concern with selling “subject to” revolves around what happens if the buyer stops making payments on the seller’s existing mortgage. Of course, it is always important to ensure that the transaction is based on sound financials and that the buyer is responsible. But in a worst case scenario, if the buyer is not making payments, the seller would go through a foreclosure process to get the house back.
Another concern is the possibility of the “due on sale” clause being invoked. This clause allows the lender on the seller’s existing mortgage to require full payment of the loan when the property is transferred from the seller to the buyer. This clause is rarely invoked, but when it is, the parties have a number of strategies at their disposal. One is to transfer the house back to the seller and set up a different kind of arrangement where ownership does not transfer until the existing mortgage is paid off. This may be done with an automatically renewing lease option or an agreement for sale (or contract for deed, land contract, etc.), among other options.
How it Works
The mechanics of a “subject to” arrangement can be relatively complicated, but essentially revolve around a purchase contract with a number of addenda that may include: a Power of Attorney, an Authorization to Release Loan Information, a “Subject To” Addendum, and additional Representations and Warranties.
Conclusion
Selling a house “subject to” is useful in a variety of different situations. If this kind of arrangement is something you may be interested in, let’s talk about it!