A subject-to transaction refers to purchasing a property while keeping the underlying mortgage, and /or other debts intact. It is essentially taking over the payments on an existing mortgage. With a subject-to sale, the seller’s name and the current terms of the seller’s mortgage stay the same, meaning the buyer is not assuming the loan. The buyer simply continues to pay down the existing mortgage on the seller’s behalf in exchange for ownership of the property.

Despite its long history, some investors, realtors and even title companies may not be familiar with the subject to strategy, and may raise questions about its legality. However, the subject to strategy is well recognized and acknowledged by the IRS and the Department of Housing and Urban Development (HUD). The term “subject to” is listed as a line item on a HUD-1 Settlement Statement, and the IRS provides more information on this subject in Publication 551 and Publication 537.

If you have an existing loan in place, selling your property subject-to is great way to unlock the many benefits that come with it. Here are some of them:

Quick Sale: One of the biggest benefits is the speed at which a sale can occur because the buyer is not obtaining new financing. Selling subject-to enables the buyer to purchase your property fast, even if it needs repairs.

Improve Credit: For most people, their mortgage is their biggest household expense. This means that having a performing mortgage plays a huge role in determining their credit standing. With subject-to, because the loan stays in your name, your credit will improve as the mortgage payments are made on time each month.

Loan Reinstatement: If you’re behind on mortgage payments, we will catch up all the missed payments and bring your loan current. Reinstating a mortgage is critical to keeping your credit intact.

Sell a “Unsellable” Property: A property can be considered unsellable for a few reasons: (1) If you have little to no equity, or are upside down on your mortgage, you may not be able to sell your property using traditional on-market methods. In a traditional on-market sale, the realtor commissions and closing fess are paid by the seller. This means that if you are upside down or have no equity, you will have to bring money to the closing table. (2) Your property may need considerable repairs to get it up to current “market-ready” standards before it can be sold on-market. Either of these scenarios can make a property “unsellable”. Having a buyer take over your mortgage payments might be the solution you need.

Due on Sale Clause: Every mortgage has a “due-on-sale” or “acceleration” clause which states that a lender has the right, but not the obligation, to call a loan due upon a change of ownership. It doesn’t mean that a lender will call a loan due. It merely enables the lender to choose to act. That being said, banks rarely, if ever, invoke this clause, especially for a loan of which the payments are being made. This clause has never been invoked on any of the properties we’ve bought subject-to. Learn more about this subject here.

Loan Stays In Your Name: Because the buyer is not obtaining new financing, the existing mortgage will remain in your name until one of three things happen: (1) The buyer sells the property and the underlying mortgage is paid in full at closing (2) The buyer refinances the loan, which removes your name from the debt (3) The buyer pays down the loan every month until the mortgage balance hits zero. For sellers with poor credit, having a performing mortgage in their name is extremely beneficial.

Debt-To-Income (DTI) Ratio: DTI ratio refers to all your monthly debt payments divided by your gross monthly income. Lenders use this number to determine if you qualify for new loans. If your DTI is too high, a lender may not approve you for a new mortgage. That being said, selling subject-to does not hinder your ability to purchase other properties in the future. However, sellers who intend on buying a new property less than 12 months after selling their old one, may not immediately be eligible for a new mortgage. To learn why, refer to the next question below.

The short answer is yes. Here’s how it works:

When a borrower (seller) is obligated on a mortgage debt – but is not the party who is actually repaying the debt – the lender may exclude the full monthly housing expense (PITI) from the borrower’s recurring monthly obligations if:

1. the party making the payments is obligated on the mortgage debt,
2. there are no delinquencies in the most recent 12 months, and
3. the seller is not using rental income from the applicable property to qualify.

When you’re ready to apply for a new loan, your new lender may exclude the existing mortgage debt from your Debt-To-Income (DTI) ratio when they obtain documentation showing a 12-month mortgage payment history with no late payments. We will provide that documentation when needed. Learn more here.

All of our subject-to transactions are handled by a Texas licensed Title Company or Real Estate Attorney. The seller is protected by a document known as a Performance Deed. A Performance Deed is a legal document that allows the buyer to deed ownership of the property back to the original owner if the buyer fails to make payments. This is done to avoid lengthy foreclosure and lawyer costs. This document is enforced at closing by the title company/attorney.

In the very unlikely event we are unable to make payments, the property would be deeded back to the seller through the Performance Deed. The seller would regain possession of the property and keep all the funds we’ve paid. The seller would also would get to capitalize on any improvements and appreciation that took place since the sale.

That being said, we guarantee all obligations will be paid in full, on time. We don’t want to lose the money we’ve invested, so we are highly incentivized to follow-through on our commitments.

Seller financing a property in Texas means that the seller takes on the role of the lender, which would typically be a bank in a traditional financing transaction. This strategy allows the buyer to pay the seller in monthly installments rather than using a traditional mortgage from a bank, credit union or other financial institution. Seller financing is also referred to as Owner financing.

Higher Sale Price: By offering seller financing, sellers can often command a higher selling price for their property. A buyer might be willing to pay a premium for the convenience and flexibility of this financing option, leading to a more profitable sale for the seller.

Monthly Income: As a seller, this strategy can create a consistent income stream over time. As a buyer repays the loan through monthly installments, the seller can enjoy a steady flow of passive income. This regular income can supplement the seller’s finances, provide additional financial security, or even be used for other investment opportunities.

Save On Taxes: Unless it’s your registered homestead, selling your property for cash means that 100% of your capital gains tax is owed to Uncle Sam in the year you sell. This can push you into a higher tax bracket. With seller financing, sellers can spread out their tax burden over several years. 

Faster Sale: With traditional financing, buyers often face a lengthy approval process, leading to delays in closing the deal. Seller financing eliminates the need for third-party lenders, banks, appraisals, inspections, and other extensive paperwork. This allows for a smoother transaction and faster closing.