Buying a House Subject To
You may have heard about buying a house subject to, especially in a rising interest rate environment. Using subject to is also a way that a real estate investor can save the credit of a homeowner spiraling into financial difficulties.
What is buying a house Subject To?
Buying “subject to” means buying a home subject to the existing mortgage.
It means the seller is not paying off the existing mortgage and the buyer is taking over the payments. The unpaid balance of the existing mortgage is then calculated as part of the buyer’s purchase price.
Three types of buying a house subject to options, according to The Balance:
- A straight subject to cash-to-loan. The most common form of buying a house subject to is when the buyer pays in cash the difference between the purchase price and the seller’s existing loan balance. For example, if the seller’s existing loan balance is $150,000 and the sales price is $200,000, the buyer must give the seller $50,000 in cash.
- A straight subject to with seller carryback. Also known as seller or owner financing, are most commonly found in the form of a second mortgage. A seller carryback could also be a land contract or a lease option sale instrument. For example, if the sales price is $200,000, the existing loan balance is $150,000, and the buyer is making a down payment of $20,000, the seller would carry the remaining balance of $30,000 at a separate interest rate. The terms negotiated between the parties. The buyer would agree to make one payment to the seller’s lender and a separate payment at a different interest rate to the seller.
- Buying a house subject to using a wrap-around. A wrap-around subject to gives the seller an override of interest because the seller makes money on the existing mortgage balance. Let’s say the existing mortgage carries an interest rate of 5%. If the sales price is $200,000 and the buyer puts down $20,000, the seller’s carryback would be $180,000. At a rate of 6%, the seller makes 1% on the existing mortgage of $150,000 and 6% on the balance of $30,000. The buyer would pay 6% on $180,000.
There is a fourth way of buying a house subject to.
A real estate investor evaluates the seller’s property. He sees what needs to be done to the house to meet today’s buyer’s needs, and makes an offer. However, the buyer has the seller convey the deed to the buyer, leaving the mortgage in the seller’s name. The buyer makes the payments along with any missed payments. Curing the default saves the house from foreclosure and saves the credit of the seller.
Why would any seller convey the deed?
Charlie France of CRE Online tells us, “The two main reasons are “time” and “debt relief.” If someone is being transferred, divorcing, buying a new home, or financially strapped, we can buy TODAY, so you can move tomorrow.
A real estate investor can offer the seller instant debt relief and help them out of their situation. At the same time, we can help a buyer looking for a house. One who does not, for some reason, have perfect credit and cannot purchase a home using conventional methods.”
How is “subject to” different than assuming a mortgage. Assuming a mortgage means more than taking over the loan. If you assume the loan, the bank will make you qualify for the loan and restrict the amount of money you can borrow in the future. When you purchase a house “subject to” the bank is happy because they are getting paid and there are incentives from the government to maintain the status quo.
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Terra Firma Property Solutions, LLC is a professional, full-service real estate solutions firm.
We buy and sell properties throughout the greater Kansas City area. We specialize in buying distressed homes, then renovating and reselling them to home buyers and landlords. Terra Firma Property Solutions is excited to be part of the economic rejuvenation of Kansas City and its surrounding areas.
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