Buying a House Subject To

You may have heard a whisper in Springfield 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 floundering in 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:

1. A straight subject to cash-to-loan. The most common type of 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.
2. 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.
3. Wrap-around subject to. 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.

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