A great technique to sell a house quickly is sell it “subject to” the existing financing. This is another variation of owner financing but no new mortgage is created. Instead, the seller deeds the house to the buyer who then takes over making payments to the existing lender. This involves closing at the title company just like any other sale, so after the buyer purchases the property the seller no longer has any claim to the property. Functionally this is similar to a loan assumption but technically it’s not an assumption because the seller’s name is still on the original loan.
- House value: $200,000
- Existing loan amount: $180,000
- Cost of sales: $15,000 (typically 7 to 8%)
- Sales price: $190,000
Normally, this house would have to be sold for $205,000 or more to pay off the existing loan and cost of sales. Selling subject-to enables the seller to sell the house for $190,000 with no closing costs other than title insurance and small fees which are paid by the buyer.
Selling a house subject-to allows for a very quick transaction because the buyer doesn’t need to qualify for a new loan or wait for an appraisal. The downside is that the loan is still in the name of the seller. This means that if the buyer stops making the monthly payment it affects the seller’s credit. As a seller you have to verify that the buyer has a strong financial backing and is buying the house as a way to save money, not because they can’t qualify for a loan.
Can the lender call the loan due if the property is sold subject-to?
Technically yes, but practically no. Almost all mortgages have a “due on sale” clause that gives the lender the right to call the loan due when the house is sold. Practically speaking, though, this is extremely rare in cases where the loan payments have been and continue to be paid on time. Think about it – logically it doesn’t make sense to disrupt a good thing: a performing loan. Also, it would take the lender some effort to even know that a sale took place.
Can a property be sold subject-to when payments have been missed?
Yes, in some cases if the house is worth more than the loan and cost of sales, the buyer may be willing to make up the back payments and buy the property subject-to.
How will selling subject-to affect the seller’s credit?
Usually not at all, but it depends. If the seller has missed payments in the past and then a buyer makes up the missed payments and pays on time going forward, it will actually improve the seller’s credit score. If, on the other hand, the seller sells to a buyer that is not able to make the payments on time going forward, it can hurt the seller’s credit.