What is Subject To Financing?
Real estate investors should always know all of their buying options. A cash deal doesn’t always work and sometimes you have to get more creative with your financing. The seller’s financial situation and how much they still owe on their mortgage are other factors that can come into play.
As a successful real estate investor, you will want to familiarize yourself with “subject to financing” (also known as a “subject to mortgage”). If you are already familiar with this buying method, then fantastic. If not, you probably will want to read on…
What is a Subject To Mortgage?
Subject to financing will generally tip the scale in the buyer’s favor, at least when the deal is done right. A poorly structured deal could be a mess for the buyer AND the seller! In a subject to deal, the buyer will essentially take over the mortgage payments of the seller in exchange for the title deed to the house.
The buyer is not paying off the seller’s existing mortgage debt or taking over the mortgage in their own name. The mortgage loan stays in the homeowner’s name and the buyer will continue to make payments on their behalf. Technically, the buyer will send the payments to the seller to then pay the lender.
Why is Subject To Financing Advantageous?
How much the seller currently owes on their property will factor into the purchase price, but the biggest advantage to the buyer is usually the interest rate. If the seller has a favorable interest rate locked in on their loan (as in lower than what prevailing rates are now if you are borrowing money for the purchase), then you can save money by taking over their mortgage payments.
In general, a subject to mortgage transaction will net you the property at a lower overall sales price. The transaction can be completed quickly because there isn’t a need for an escrow process or any closing costs. There are typically no down payments, unless some cash upfront is part of the agreement with the seller. It is important to note that all subject to financing transactions are different based on what the buyer and seller agree upon.
Risks vs. Rewards
That is where subject to financing can get tricky. The seller is usually assuming more risk because they are depending on the buyer to continue making the mortgage payments. The loan is still under their name, and they assume all the risk if the buyer defaults on the mortgage. However, sellers in financial distress situations or who are eager to sell a property quickly will find some benefits with a subject to mortgage agreement with a buyer or investor. Obviously, if mortgage payments are made on time each month, it’s good for the seller’s credit rating and overall financial standing. There are definitely times when this makes great sense for both parties involved in the home sale.
The absolute most important thing to remember about subject to financing is that the contracts must be structured properly to protect both parties. The seller has to protect their financial situation and do what they can to ensure the payments will continue to be made in their name. The buyer has to ensure they can take ownership of the property without excess costs and complications beyond the agreed sales price and ongoing mortgage payments.
Some subject to financing deals are fairly complex. Others are quite simple. The key is to understand how they work and how they can sometimes work in your favor as a real estate investor.
We help investors in the PropertyLark network with subject to mortgages all the time as we are dealing with a lot of sellers in financial distress situations, as well as those who are looking for a quick and clean sale for other personal or financial reasons. We bring you the best investment properties and creative financing options that will benefit both the buyers and sellers. To apply to join the PropertyLark home buying network, visit our buyer’s page and fill out the information at the top.