Under most scenarios, home purchases are subject to getting approved for a loan. In this scenario, if a borrower does not get approved for the loan, the seller will still be liable for mortgage payments until the loan is secured by the new homeowner.
A loan assumption is the transfer of a mortgage from the seller to the buyer of a property. While all loan programs can have a loan assumption, many lenders may prevent the seller from transferring a loan to the buyer. To prevent the loan assumption, the lender may add a due on sale clause on the mortgage, which indicates that upon the sale of the property, the full interest of the lender must be repaid.
Reasons to Purchase A Home Subject To the Mortgage
The main reason for someone to purchase a home with subject to is in order to absorb the current interest rate held by the seller. Depending on the interest rate of the buyer and seller, retaining the interest rate can make a huge difference in the monthly payments on the home’s mortgage.
Another reason that subject to financing on homes are so popular is that a buyer with a spotty credit report can still purchase a home if the seller feels confident enough in the buyer. Typically in conventional financing, someone with bad credit would be turned away from certain deals due to the fear of them defaulting on their mortgage.
Types of Subject To
There are three types of subject to options that exist that don’t directly center around owner financing.
The most popular type of subject to is a straight cash-to-loan, this is when a buyer uses cash to cover the difference of the homes listing price and the current owners balance remaining on their loan. If the sale price of a home is $800,000 and the owner has a loan balance of $750,000, the individual purchasing the home must give the seller $50,000 in order to cover the difference.
A wrap-around subject to will provide with the current owner (seller) the opportunity to overrule any interest due to the fact that the seller will make money on any existing mortgage balance.
A straight subject to with a seller carry back is commonly found in a second mortgage. Also found in the form of a land contract or lease option, a seller carry back can be used as a sale’s tool.
Subject To vs. Loan Assumption
In a loan assumption, a buyer will typically take on the loan as long as they have been granted permission to do so by the bank. The seller of the property has their name removed from the loan and the buyer then applies to qualify for the loan. Banks will most likely charge the individual purchasing the home an assumption fee in order to process the loan assumption.
Subject to can prove to be risky as banks reserve the right to push the buyer into paying off the loan faster than their previous client due to the acceleration clause. This clause can cause many problems for the buyer, if they cannot meet the banks demands and default on their mortgage payments then the bank could call for a foreclosure.
