Very few homeowners have ever heard of the concept of subject to in real estate and the same can be said about many residential real estate agents. Subject to is one of those things that unless someone has personal experience or had somebody present it to them, few will be familiar with.
As a realtor, it is very important to understand the aspects of subject to that typically concern a seller. Although subject to has been around for decades and there is a wealth of knowledge available, it is not without risk for the parties involved and some concerns are well-founded.
The following are some of the typical concerns sellers have when presented with a subject to offer:
What happens if the buyer stops making the mortgage payments?
In a subto transaction, the seller remains contractually responsible for the underlying mortgage that is being left in place untouched. This means that in the rare case that the new owner stops making the mortgage payment, the seller is responsible to make those payments or risk foreclosure. Experienced subject to investors will have considerations in their contract specifically focused on their failure to perform. A popular tool used is a performance clause that outlines the course of action for the seller to regain the title of the home if the new owner stops making the mortgage payments. Once the seller has the title, they can sell the home at market price and keep the proceeds including whatever principal has been paid by the new owner.
Investors purchasing a home subject to the debt are highly motivated to perform and never miss a payment because losing the property implies losing all of the money invested as well as any equity or appreciation they have built in the time of their ownership.
It is important as a realtor to know what questions to ask a potential buyer in a subject to transaction to help verify they have experience.
Will I be able to purchase another home with a loan in place?
This answer depends entirely on the seller’s overall financial situation. There are lenders that specialize in issuing loans to people who have sold a home subject to the mortgage. In some situations, lenders will accept statements and supporting bank documents that prove the payments for the mortgage have been made by a third party (the new owner). Some lenders also accept the use of a third party loan servicer who will manage the payments from the new owner directly to the lender. Many lenders will eliminate a large portion of the debt to income ratio by simply having a third party servicer in place and will typically eliminate 100% of the DTI after 1 year of servicing.
Lease purchases are also an alternative way to structure subject to transactions while providing the seller some more security for being able to acquire new debt in the future.
Again, the reality is that this depends on the lender the seller plans to use for their next purchase.
What happens to my credit?
Most homeowners that sell their home subject to the mortgage do not see any impacts on their credit related to the sale as long as the new owner makes the mortgage payments on time as agreed to in the purchase contract.
Sellers in financial distress or ones that have missed one or more payments may see an improvement to their credit thanks to the on-time payments made by the new owner.
I’m a veteran and need my eligibility to buy my next home, would this keep me from using my VA benefits on my next purchase?
Eligible military veterans, service members, and survivors can purchase more than one home using their VA benefits, although their eligibility will be impacted on their next purchase.
One of the biggest misconceptions that military veterans have is that selling a home subject to will keep them from purchasing another home using their VA benefits, which is simply not true.
Veterans with an existing mortgage will have a VA loan limit for their next purchase based on the county loan limit minus the entitlement that they have already used.
remaining eligibility = county loan limit – entitlement used
For example, a veteran with an existing mortgage of $300,000.00 sells their home subject to and wishes to purchase their next home in Miami-Dade County, Florida. In this case, the seller should still be able to purchase up to a $425,000.00 home with their remaining VA eligibility.
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