Trying to buy a house?
Looking to buy your first home, but the idea of coming up with a large downpayment and getting a traditional mortgage feels impossible? Going the traditional mortgage route feels like climbing Mount Everest without any gear. Maybe your credit score isn’t exactly good looking, or you don’t have a pocket full of cash or even a tiny mountain of cash ready for a down payment. Don’t worry too much because your aspirations to become a homeowner is possible and the answer is actually right under your nose! Subject-to the mortgage might just be your golden ticket.
What exactly is buying Subject-To the mortgage?
What if you could just move into someone else’s home and simply take over their mortgage payments without having to qualify for a new loan. How cool would that be? That’s exactly what subject-to mortgage is. Let’s look at how this works:
You simply take over the existing mortgage on a property and start making the monthly payments. Sounds good, right? The seller gets off the hook by not having to pay for the house anymore, he can just walk away and move on with his life. This leaves you with a house that you own and control and do as you see fit. You can rent it or move in and make it your new home. It’s like getting a car and taking over someone else’s car note. Works the same way, except you never need to assume the note or qualify for it.
From the Seller’s Perspective
They can sell their property quickly and move on with their lives. They get a quick sale and avoid a possible default on their loan that would impact their credit. There’s no need to put the house on the market, hire and pay a realtor, just to go through the dreaded experience of having buyers trampling through the house. There’s no fixing and no appraisal to worry about, “will it appraise?” It’s just a simple exchange with no complications.
But What About the “Due-On-Sale” Clause?
There is no prison time for it, the due-on-sale clause is not a law. It’s a clause written into every mortgage, by mortgage lenders to protect themselves. In a nutshell, the mortgage company is saying that if the borrower sells the property, they want the loan to be paid off in full at the time of the sale. This clause was written into all mortgages since 1978 by lenders not the government, it’s not the law. So, do they call the loan due? From the perspective of a lender, they just want their payments and as long as somebody is making the payments, nobody gets hurt. As long as they keep accepting the payments, you’re good. Of course, if the lender makes an issue of it, you can always refinance the property or sell it.
Pro Tip: Try to refinance the property as soon as possible but not before 6 months. During the six months, your title will be considered “seasoned” and you would be able to refinance and get out of the seller’s loan. Most of the investors in our group do stay on the loan for at least 5 years or until they are able to refinance. Anyone can use a DSCR (Debt Service Credit Ratio) loan to refinance out of a subject to deal. These DSCR lenders focus on the property’s ability to generate enough income to cover the debt obligations. This means they look at the potential rental income rather than the borrower’s creditworthiness. Unlike conventional loans, this loan does not depend on your personal income, and you can qualify even if your credit is less than perfect.
How To Do It?
Here’s the scoop: You take over the existing mortgage and start making the monthly payments. Simple, right? Well, mostly. The seller stays on the hook for the loan, which means if you mess up, their credit score could take a hit. So, it’s kind of like borrowing your friend’s car and promising not to scratch it.
That being said, here is how to buy a house with subject to technique.
- Identify a property: Find a property where the seller is motivated to sell and might be open to a subject-to deal. This could be due to financial difficulties, life changes, or simply wanting to move quickly.
- Second, negotiate terms: Work out the terms with the seller where you purchase by taking over their existing mortgage payments. It’s important to build trust and ensure they understand the process.
- Sign a Purchase Agreement: Draft a purchase agreement that outlines the terms of the subject-to deal. Then get the deal under contract.
- Close on your purchase: Finalize the transaction. This typically involves working with a title company or real estate attorney to make sure everything is done legally.
- Start Making Payments: you would make the monthly mortgage payments just as the seller would, as on the mortgage note agreement. Treat the mortgage loan just as if you had signed it yourself.
Why Subject-To Works
If your credit score is more “meh” than “wow,” subject-to mortgage is your new bestie. It’s a great way to get your foot in the door (literally) without the usual financial gymnastics that you would have to go through buying a house the conventional way. It’s going to save you a lot of money on downpayment, closing costs and fees, not to mention the hassles of qualifying for a mortgage. Here are some benefits:
- You Save on Closing Costs: Forget about those hefty closing costs. Buying your house subject-to could save you money big time. Depending on when the seller got their mortgage, you may even score a lower interest rate loan. It’s like finding a secret door to the wonderful land of houses, you’ll be well on your way to homeownership.
- Super Quick Closings: No need to wait around trying to qualify for mortgage. Subject-to deals usually close much faster than conventional purchases, faster than you can book a trip to Cancun.
- The Best Buying Terms: These terms make both you, the seller and the mortgage company happy because the seller gets to sell his property and avoid a possible foreclosure, the lender continues to receive loan payments as agreed and avoids having to foreclose and you get a house without qualifying for a new loan. It’s a win-win-win situation where everyone gets what they want.
The Seller’s Perspective
Most sellers just want to sell their house, pay off the mortgage, and move on with their lives. For them to consider a subject-to deal, they need a good reason—like struggling with mortgage payments or dealing with life’s curveballs. Maybe they’re just tired of that haunted attic (hey, it happens).
You’re On Title It’s Your House
The key to a successful transaction and a happy seller is to treat the seller’s mortgage as if it were yours, as if you had gotten it in your own name. It makes no sense to take over a property subject-to if you’re not going to take care of the property and pay the mortgage as everyone expects. This technique is not right for you if you’ve lost your income, got evicted and can’t pay for anything. The best thing is to wait until you have an income and then go for it. Even though there’s no money down, you don’t have to come up with a downpayment or closing costs, you still have the burden to pay the monthly mortgage payments and take care of the house.
While taking over someone’s property subject to is a fantastic way to get into properties, it’s not without its risks and paying someone else’s mortgage is a big responsibility. You should treat it as if you signed on the dotted line for the mortgage yourself. In all that’s been said, Subject-to is a fantastic technique to use to start building passive income. You’ll be building up your income-producing real estate portfolio without qualifying for any loans. Since the loans aren’t in your name, there are no limits on how many properties you can buy. It’s also a great tool for seasoned investors to generate wealth quickly. Imagine building your real estate empire one subject-to deal at a time, while you are at your job, then you turn around and quit once your income replaces your salary.
So, that’s it! Subject-to investing is like the private dining room at the back of your favorite restaurant—once you experience it, you’ll never want to dine with the regular folk again. Are you ready to finally take your journey to homeownership? Okay, let’s do this!