In real estate wholesaling, buying a property “Subject To” an existing mortgage allows you to purchase a home quickly without needing a new loan or a credit check, saving you time and money. However, there are risks involved, such as the lender possibly calling the loan due—which could lead to foreclosure—and the seller’s credit being damaged if you don’t make the payments.
In this post, I’ll explore the benefits and risks for both you and the seller when buying property Subject To an existing mortgage.
I’ll present both sides so you can make an informed decision about whether this strategy is right for you.
I’ll also offer tips on how to avoid some of the potential problems such as those I just mentioned above.
Let’s start with the person most affected by these agreements: the property owner who is selling you their house while their existing financing stays in place.
What are the benefits of a Subject To agreement to the seller?
In Part 1 of this series, What is the Subject To Real Estate Investment Strategy?, I explained:
- – The fundamentals of buying properties “Subject To” existing mortgages
- – The reasons a seller might consider this option
- – The exit strategies available to investors
Now, let’s get into the specific benefits and risks associated with this strategy.
Many properties suitable for a Subject To transaction involve motivated sellers who cannot sell through conventional methods.
According to the National Association of Realtors (NAR), distressed sales—including foreclosures and short sales—accounted for about 2% of all home sales in 2024.
These sellers often face urgent financial pressures, such as impending foreclosure, job loss, or medical emergencies. They might also lack sufficient equity in their property or own homes that require significant repairs, making traditional sales challenging.
Financial expert Dave Ramsey notes, “For homeowners in tough situations, unconventional selling methods can provide a way out when traditional routes are blocked.”
This is where a Subject To agreement becomes a viable solution.
Below are some benefits for sellers who choose to enter into a Subject To sale agreement.
Quick Sale
One of the most significant benefits to the seller in a Subject To agreement is the speed at which the property can be sold.
Traditional home sales often involve lengthy processes—securing new financing, waiting for loan approvals, conducting inspections, and making necessary repairs—all of which can extend the closing timeline to several weeks or even months.
In contrast, a Subject To transaction can expedite this process dramatically.
Because the buyer is taking over the existing mortgage, there’s no need for them to obtain new financing. This eliminates one of the most time-consuming steps in a typical real estate transaction.
Additionally, sellers aren’t required to invest time and money into repairs or renovations to meet lender or market demands. This can be particularly advantageous for those facing financial difficulties, job relocations, or other urgent situations requiring a swift sale.
By bypassing traditional hurdles, a Subject To agreement can lead to a closing in just a few days.
This rapid turnaround provides immediate relief from financial pressures, such as impending foreclosure or accumulating mortgage payments.
It allows sellers to move on quickly without the stress and uncertainty that can accompany a prolonged sales process.
Moreover, the quick sale aspect is especially beneficial in sluggish markets or when the property has been listed for an extended period without attracting viable offers.
By offering a solution that accelerates the sale, sellers can avoid the emotional and financial toll of a property that lingers on the market.
Get Current on Payments, Improve Credit
For sellers who are behind on their mortgage payments and facing the threat of foreclosure, a Subject To agreement can offer a lifeline.
According to the Mortgage Bankers Association, nearly 4% of U.S. homeowners were delinquent on their mortgages in the first quarter of 2023. Falling behind on payments can significantly damage a seller’s credit score, dropping it by as much as 100 points or more, as reported by FICO.
By entering into a Subject To agreement, you, as the buyer, bring the mortgage current by catching up on the missed payments.
This immediate action halts the foreclosure process, preventing further negative marks on the seller’s credit report.
As you continue to make timely payments on the existing mortgage, the seller’s credit can improve over time. Each on-time payment contributes positively to their payment history, which accounts for 35% of a FICO credit score—the most significant factor in credit scoring.
Financial expert Suze Orman emphasizes the importance of payment history: “Maintaining a positive payment history is crucial for credit recovery. Consistent, on-time payments can gradually rebuild your credit score, opening doors to future financial opportunities.”
For sellers who have struggled financially, this arrangement provides a path to rehabilitate their credit without the burden of managing the mortgage themselves.
In essence, a Subject To agreement not only offers immediate relief from financial distress but also aids in the long-term restoration of the seller’s financial health.
Get Rid of Otherwise Unsellable Home Quickly
Sellers often face challenges when their property has little to no equity or requires significant repairs. According to CoreLogic, as of mid-2023, about 1.8 million U.S. residential properties were still underwater, meaning the homeowners owed more on their mortgages than the homes were worth.
This situation makes it difficult to sell the property through traditional methods without incurring additional costs.
In a standard sale, sellers may have to cover closing costs, agent commissions, and potential repair expenses, which can total up to 10% of the home’s sale price, according to the National Association of Realtors (NAR).
For homeowners already struggling financially, these costs can be prohibitive.
Moreover, properties in need of substantial repairs can linger on the market. A survey by HomeLight found that homes requiring significant updates can take up to 50% longer to sell and may sell for up to 56% less than comparable properties in good condition.
By offering to take over their mortgage payments through a Subject To agreement, you provide a viable solution for sellers who might not have any alternative options.
Real estate expert and author Robert Kiyosaki notes, “Creative financing strategies like Subject To can create win-win situations where traditional financing falls short.”
This arrangement allows the seller to offload an unsellable home quickly without the financial burden of closing costs or repairs.
What are the benefits of Subject To for you?
Save Time with a Quick Close
Time is often of the essence for both buyers and sellers in real estate transactions. Traditional closings can take anywhere from 30 to 60 days, sometimes longer if financing issues arise.
According to Ellie Mae’s Origination Insight Report, the average time to close a mortgage loan was 48 to 53 days in 2023.
A Subject To agreement accelerates this process significantly.
Since you’re not obtaining new financing, you eliminate the lengthy loan approval process, credit checks, and extensive paperwork typically required by lenders. This streamlined approach can reduce the closing timeline to as little as a few days.
This rapid closing is particularly beneficial if you have a time-sensitive exit strategy, such as flipping the property or quickly adding it to your rental portfolio.
As real estate investor Than Merrill points out, “The ability to close quickly can give you a competitive advantage in acquiring properties that others might miss out on due to financing delays.”
For the seller, a swift sale alleviates immediate financial pressures, such as impending foreclosure or mounting mortgage payments.
It allows both parties to move forward without the delays commonly associated with traditional real estate transactions.
Avoid a Credit Check
Securing traditional financing often requires a thorough credit check and a strong credit score. According to Experian, the average FICO score for approved mortgage applicants was 758 in 2024.
For investors with less-than-perfect credit or those who prefer not to impact their credit utilization ratio, this can be a significant barrier.
A key advantage of a Subject To purchase is that it bypasses the need for you to obtain new financing. Since you’re taking over the seller’s existing mortgage, your personal credit score is not a factor in the transaction.
This allows investors who may not qualify for traditional loans to acquire properties and expand their portfolios.
Real estate mogul Grant Cardone emphasizes, “In the world of real estate investing, leveraging alternative financing methods can open doors that conventional loans might keep closed.”
By avoiding the credit check, you not only expedite the purchasing process but also preserve your credit capacity for future investments or emergencies.
Save Money
A Subject To agreement can result in significant cost savings, enhancing your return on investment:
- – No Down Payment Required: Traditional mortgages typically require a down payment ranging from 5% to 20%. On a $250,000 property, that’s $12,500 to $50,000 upfront. By taking over the existing mortgage, you often avoid this expense, allowing you to allocate funds elsewhere.
- – Avoidance of Lender Fees: Closing costs for a new mortgage can range from 2% to 5% of the loan amount, according to Zillow. These include origination fees, appraisal fees, and underwriting fees. With a Subject To purchase, many of these costs are minimized or eliminated.
- – Lower Interest Rates: If the seller secured their mortgage when interest rates were lower, you benefit from that rate, which might be more favorable than current market rates for investment properties. As of early 2023, investment property mortgage rates were about 0.5% to 0.75% higher than owner-occupied rates, per Freddie Mac data.
- – Reduced Holding Costs: Faster closings mean you start generating income sooner, reducing the time you hold the property without revenue.
Potential for Immediate Equity
Acquiring a property Subject To the existing mortgage can sometimes mean purchasing below market value, particularly when dealing with motivated sellers. According to RealtyTrac, distressed properties often sell for 15% to 20% less than non-distressed homes.
This discount can translate into immediate equity for you. For example, if you acquire a property worth $200,000 for $170,000—the balance of the existing mortgage—you gain $30,000 in equity at the outset. This equity can be leveraged in several ways:
- – Refinancing: Use the equity to refinance the property under better terms or to pull out cash for other investments.
- – Selling: Flip the property at market value for a profit.
- – Leveraging for Loans: Use the equity as collateral for additional financing.
Real estate investor Brandon Turner from BiggerPockets highlights, “Instant equity not only boosts your net worth but also provides flexibility in your investment strategy.”
No Credit Risk
Since the mortgage remains in the seller’s name, the debt doesn’t appear on your credit report. This means your debt-to-income ratio remains unaffected, preserving your borrowing capacity for other investments.
However, it’s important to note that while you may not face credit repercussions from the lender if payments are missed, you have a contractual obligation to the seller. Failure to make payments can result in legal action against you for breach of contract.
As attorney and real estate expert William Bronchick explains, “While your credit score may not be directly impacted, your reputation and legal standing can suffer if you default on your agreement with the seller.”
Essentially, the primary financial risk to you is the capital invested in the property.
If the lender initiates foreclosure due to non-payment, you could lose any money put into repairs, improvements, or initial costs.
What are the risks of Subject To investing? How can you mitigate them?
Although Subject To can have significant benefits to both parties, it comes with deal risk to both the end-buyer and wholesaler, and significant personal risk to the seller, all of which should be weighed and mitigated as much as possible before undertaking such a transaction.
Risks to Both You and the Seller
Due on sale acceleration leading to foreclosure
The due-on-sale clause is a provision in most mortgage agreements that allows the lender to demand full repayment of the loan if the property is sold or transferred without their consent.
If triggered, and the loan isn’t paid off or refinanced promptly, the lender can initiate foreclosure proceedings.
This risk affects both parties:
- – Seller: Faces potential foreclosure, which can severely damage their credit score and financial standing.
- – Buyer: Risks losing the property and any investments made into it, such as renovation costs or down payments.
To mitigate this risk, consider the following strategies:
- Notify the Lender and Obtain Written Approval
Being upfront with the lender may result in them approving the transfer. Some lenders may be willing to work with you, especially if payments have been timely and the loan is in good standing. However, there’s a possibility the lender could refuse and demand full repayment. - Notify the Lender and Proceed if No Objection
You can inform the lender of the transfer and, if they don’t respond or object, proceed with the transaction. This approach assumes that the lender’s silence is consent, but it doesn’t guarantee they won’t enforce the clause later. - Do Not Notify the Lender
Some investors choose not to inform the lender, hoping the transfer goes unnoticed. This method often involves transferring the property into a land trust to obscure the change in ownership. Attorney and real estate expert William Bronchick discusses this approach in his article, “There’s No ‘Due on Sale’ Jail,” noting that while it’s not illegal, it carries inherent risks.
Attorney William Bronchick gives some of the best explanations I’ve seen anywhere outlining the legal implications of not notifying the lender in his article: There’s No “Due on Sale Clause” Jail
Ultimately, the most effective way to mitigate the due-on-sale risk is to be prepared to refinance or pay off the loan if necessary.
Consulting with a real estate attorney experienced in Subject To transactions is highly recommended to navigate this complex area.
Seller’s Risk
The seller assumes significant risks in a Subject To transaction.
Since the mortgage remains in the seller’s name, any missed payments by the buyer directly impact the seller’s credit score.
Late payments or defaults can lower the seller’s credit score by 100 points or more, making it difficult to obtain future financing.
As financial advisor Clark Howard emphasizes, “Sellers must ensure they’re protected when allowing someone else to take over their mortgage payments.”
Potential risks to the seller:
Inability to Qualify for New Loans
The existing mortgage affects the seller’s debt-to-income ratio, potentially hindering their ability to secure new loans for a car, credit cards, or even another home. Lenders may be hesitant to extend additional credit when a significant debt remains on the seller’s record.
Lack of Control Over Loan Duration
The seller has no control over when the mortgage will be paid off. If the buyer decides to hold the property long-term, the seller remains tied to the loan until it’s fully repaid, which could be decades. This indefinite commitment can be financially and emotionally taxing.
To mitigate these risks, sellers should:
- Thoroughly Vet the Buyer: Assess the buyer’s financial stability and track record.
- Include Protective Clauses: Add terms to your contracts that require the buyer to refinance the loan within a specific timeframe.
- Seek Legal Counsel: Consult with a real estate attorney to understand all potential risks and protections.
Buyer’s Risk
As a buyer, you also face several risks in a Subject To transaction.
Loss of Title Due to Non-Payment
If you, the buyer, fail to make the mortgage payments, the lender can foreclose on the property.
This results in the loss of any investments you’ve made, including down payments and renovation costs.
According to ATTOM Data Solutions, the average cost to rehab a property is around $30,000, which you stand to lose in a foreclosure.
Lawsuit for Non-Payment
The seller can sue you for breach of contract if you don’t uphold your agreement to make the mortgage payments.
Legal battles are costly and time-consuming, potentially resulting in financial judgments against you.
Seller’s Remorse Lawsuit
If the seller is unable to secure additional financing or pay off the current loan after the transaction is finalized, the longer you own the property, the greater the risk that the seller may try to exit the contract.
If the seller regrets the deal, they might allege misconduct or that they were misled, leading to legal action to regain the property.
Even if unfounded, defending against such claims can be expensive.
To protect yourself:
- Disclosure, Disclosure, Disclosure
Be transparent with the seller about all aspects of the transaction. Ensure they fully understand the terms, risks, and their ongoing obligations. Document all communications and have all agreements reviewed by legal professionals. - Disposal
Aim to satisfy the existing mortgage as soon as possible. Whether through refinancing into your name or selling the property, relieving the seller of their mortgage obligation reduces the risk of future disputes.
Real estate expert Phil Pustejovsky advises, “Clear communication and ethical practices are your best defense against legal complications in creative financing deals.”
The bottom line is that your level of aversion to risk will guide you in whether this arrangement will ultimately work for you.
Final Words
In wrapping up, it’s clear that purchasing properties Subject To existing mortgages can be a powerful strategy. This approach offers significant benefits, such as quick transactions, less need for your own capital, and the opportunity to assist sellers in challenging financial situations. However, it’s absolutely crucial to be mindful of the potential risks to both you and the seller.
Success in Subject To investing relies on thorough due diligence, transparent communication, and ethical practices. By fully understanding the legal implications and potential pitfalls, you can navigate these deals effectively and responsibly. If you’re considering this strategy, weigh the pros and cons you’ve just read carefully and consult with professionals when necessary.
In Part 3, I dive into the steps to a successful Subject To deal, step-by-step from beginning to end. This includes performing due diligence, formulating the offer, the types of documents needed, and how to complete the transaction.
