We need to face a hard truth: There’s a record-breaking number of houses that are in forbearance today. It’s roughly 2.5 million, according to the Mortgage Bankers Association. This number is largely due to the Covid pandemic– which set restrictions that prevented lenders from evicting homeowners who weren’t meeting their mortgage payments.
Now, with those restrictions getting lifted, homes that are in forbearance will begin to foreclose. In turn, many homeowners are going to be desperate to escape from underneath their mortgages. So, what does this mean for buyers in the real estate market?
Enter, subject to mortgages.
What’s A Subject To Mortgage?
A mortgage that’s ‘subject to’ results when a buyer purchases property that’s ‘subject to’ the existing mortgage. Simply put, with this type of agreement, the buyer takes over the seller’s remaining balance on the mortgage without having to put it in ink with the lender.
Think of this type of property financing as the key that unlocks the door to your dream home. It’s a type of loan that lets you buy a property without the stress of needing to give a hefty down payment or show proof of income.
Thus, it’s a smart way for you (the buyer) to get your foot in the real estate market without having to put a dent in your wallet.
Subject To Mortgage Pros And Cons
'Subject to' real estate investing can be a win-win for the buyer and the seller. This is because it lets the buyer leverage a low-fee deal and lets the seller escape from a mortgage they can no longer pay for.
For this article, we’ll focus on the pros and cons of this kind of financial arrangement for buyers.
You Don’t Have To Qualify
Opting for this type of mortgage provides a HUGE benefit to buyers who don't meet the qualifications for a traditional mortgage. This is because buying a house 'subject to' means you don’t have to undergo the approval process. When the buyer takes over the existing mortgage from the seller, they find the loophole in avoiding a credit check, proof of income, or down payment.
Thus, the buyer can secure a property more easily, even if they have limited income or no liquid cash for a down payment. Likewise, it’s a great option for buyers who have less-than-average credit scores– a.k.a, every recently graduated Millennial who’s up to their neck in student loan debt.
You Pay A Lower Interest Rate
A popular incentive for buying a 'subject to' loan is that you get the interest rate that came with the seller’s existing loan. In other words, you get to take over their current rate. So, if the market interest rate is at 5%, but the seller’s sitting pretty at a 2% fixed rate, you get that 2% rate.
You Have Lower Fees
Purchasing 'subject to' real estate lowers the fees associated with home buying. Essentially, it gives buyers a ‘workaround’ for closing costs, broker commissions, and origination fees. This makes it a good way for buyers to get their feet wet in the real estate market without having to pay as high of costs.
While the benefits far outweigh the risks for the buyers in a ‘subject to’ deal, it’s important to be aware that they can face risks if the seller goes into bankruptcy.
In the words of Michael Scott in The Office, “I declare… BANKRUPTCY!” is not something you want the seller to ever shout (or unlike in Michael Scott’s case, actually declare with a bank). If the seller does go into bankruptcy, the home could be seized.
Likewise, not only is this scenario a risk for the buyer, but it’s obviously a bad situation for the seller as well.
Financing Options For 'Subject To' Properties
There are three ways a buyer and a seller can pull the trigger on a subject to mortgage. We’ll go over each type so you can figure out which one would work the best for your financial scenario.
Straight Subject To Cash-To-Loan
This is the most traditional of the three types of subject to mortgages. It’s when the buyer pays the difference between the purchase price and the remaining balance on the seller’s existing loan. And, as its name implies, the buyer elects to pay this difference in cash.
So, let’s say that the seller carries a balance of $125,000 on their existing loan and both parties have agreed upon a sales price of $275,000. The buyer would have to pay the seller the sales price, plus the difference between the sales price and the seller’s existing loan balance. In this scenario, the buyer would owe $425,000 to the seller.
($275,000 + ($275,000 - $125,000) = $425,000).
Straight 'Subject To' With Seller Carryback
This real estate financing arrangement occurs when the buyer takes over the existing mortgage payments for the seller and the seller retains an ownership interest in the property. The seller agrees to “carryback” a portion of the purchase price. Let’s take a quick look at an example.
Say that the buyer and the seller agree to terms on a $350,000 'subject to' purchase agreement. But, the existing balance on the seller’s current loan is $200,000. This means that if the buyer made a 20% down payment, the seller would have to carry the leftover balance of $40,000.
($200,000 x 20% = $40,000)
Wrap-Around Subject To
A wrap-around subject to mortgage allows the seller to keep the existing mortgage in place while creating a new one to wrap around it. In other words, it’s a separate mortgage that contains the first mortgage. This option gives the seller an override of interest since they will profit from the existing mortgage balance.
So, what does this type of arrangement look like? Let’s say that the buyer and the seller agree to a $20,000 down payment and a $225,000 wrap-around loan from the seller at a 4% interest rate. The buyer would make monthly payments to the seller for the second mortgage, which the seller could use to pay off the initial mortgage– all while pocketing the difference between the two payments.
The Process For Scoring A ‘Subject To’ Deal
Now you’ve got a good idea about what 'subject to' loans are. But how does a subject to mortgage work? We’ll teach you all about the ‘subject to’ process so you can gain an edge in the real estate market.
Find The Property
You can’t leverage a subject to mortgage without knowing how to find 'subject to' properties. So, let’s go over two popular off-market methods for locating properties that fit “subject to deals.”
HouseCashin is a super easy way to find ‘subject to’ properties. It’s an investment property marketplace that’s specifically designed for buyers looking to invest in real estate. Plus, its search refining filters are very user-friendly, so you don’t have to be a tech wizard to find what you’re looking for.
EXPIRED LISTINGS ON MLS
MLS is truly a goldmine for finding ‘subject to’ properties. Think about it– these listings are expired for a reason. When a property isn’t selling, the seller is much more likely to consider other routes to get their property off the market.
Pro-tip! Start your MLS search by browsing through homes that are vacant or have been listed for six or more months.
Make An Offer
You need to ask the right questions to ensure you’re fully educated about the property and the current mortgage you’ll be taking over. This is why making an offer is all about asking the seller questions that will give you the information you need to proceed with a proposal. So, here are a few good questions to ask that will help you make a wise offer.
Why are you selling your home?
How soon do you need to move out?
How much is your current loan balance?
How much are your mortgage payments?
Do your monthly mortgage payments include insurance and/or taxes?
Put It In Ink
Once the seller accepts your offer to take over their monthly mortgage payments, you’ll need to draft a subject to mortgage agreement. This will contain all of the mortgage loan information. So, you may need to ask the seller to provide a recent mortgage statement.
A Final Word
If you’re looking for a way to get into the real estate market without having to invest a large sum of money upfront, buying a ‘subject to’ home could be the perfect solution for your financial scenario.
Talk with a mortgage ninja at NorthPort Funding today to find out how a subject to mortgage can tip the scale in your favor on your journey to homeownership.