Subject To

Subject To: Real Estate Definition

What is a “Subject To” Real Estate Transaction?

In real estate, a “Subject To” transaction refers to acquiring a property with an existing mortgage without assuming personal liability for that mortgage. The buyer makes payments on the existing loan while the original owner—who remains liable for the loan—may benefit from mortgage relief.

Unlike an assumption of mortgage, where the buyer takes over and becomes responsible for the mortgage loan, a “Subject To” purchase means that the loan remains in the seller’s name, and the seller’s credit is still tied to the mortgage. If the purchaser defaults, they risk losing ownership of the property and any funds invested in it, but they do not bear personal liability for the outstanding loan balance.

Examples

Example 1: Abel purchases a piece of land for $1,000. The land has an existing $99,000 mortgage. Abel pays the $1,000 and agrees to make the mortgage payments, but the mortgage remains in the original owner’s name. If Abel defaults, he will lose his $1,000 but will not be responsible for the remaining $99,000 debt.
Example 2: Darren buys a house for $10,000 down, taking over a $190,000 mortgage. The mortgage continues to be in the original owner’s name. If Darren fails to make the mortgage payments, he risks losing the house and his down payment, but the mortgage lender cannot pursue him for the remaining balance.

Frequently Asked Questions

Q: Can the original mortgage lender call the loan due if the property is sold subject to?
A: Yes, the original mortgage lender can invoke the “due on sale” clause, requiring the seller to pay off the loan in full if the property is sold without their consent.

Q: Is a “Subject To” transaction risky for the buyer?
A: Yes, the buyer risks losing their down payment and any equity if they default, and the lender calls the loan due.

Q: What are the benefits of “Subject To” transactions for the buyer?
A: Buyers can acquire property with little upfront cash and without qualifying for a new loan, potentially benefiting from favorable existing loan terms such as lower interest rates.

Q: How can sellers benefit from a “Subject To” transaction?
A: Sellers can relieve themselves of immediate mortgage payments and may facilitate a faster sale, particularly if they are in financial distress.

Q: What legal documents are typically used in a “Subject To” transaction?
A: The primary documents include a purchase agreement that outlines the terms of the “Subject To” condition, a deed transferring ownership, and any disclosures about existing mortgage terms.

Assumption of Mortgage: The process where a new buyer takes over the seller’s existing mortgage and becomes personally liable for the debt.
Down Payment: The initial upfront portion of the total amount due that a buyer pays to secure a property, typically expressed as a percentage of the purchase price.
Due on Sale Clause: A clause in a mortgage contract requiring the loan to be paid in full if the property is sold or transferred without the lender’s consent.
Equity: The difference between the market value of a property and the amount of any loans secured against it.

Online Resources and References

Real Estate Investing Forums: Useful for discussions and personal experiences with “Subject To” transactions (BiggerPockets, REI Club).
Legal References: Information on mortgage laws and due on sale clauses can be found at NOLO and LegalZoom.
Industry Articles: Articles on “Subject To” investing strategies and risks are available from Investopedia and Realtor.com.

Suggested Books for Further Study

“Investing in Real Estate” by Gary W. Eldred: Offers an overview of various investment strategies, including “Subject To” deals and their risks and benefits.
“The Book on Investing in Real Estate with No (and Low) Money Down” by Brandon Turner: Provides detailed strategies on acquiring properties with little to no upfront cash, including “Subject To” transactions.
“Real Estate Investing for Dummies” by Eric Tyson and Robert S. Griswold: A great resource for beginners that covers a range of investment strategies and terms, including “Subject To” transactions.

Real Estate Basics: Subject To Fundamentals Quiz

### Who remains liable for the existing mortgage in a "Subject To" transaction? - [x] The original owner - [ ] The new buyer - [ ] The mortgage lender - [ ] Both the buyer and original owner > **Explanation**: In a "Subject To" transaction, the original owner remains liable for the mortgage even though the new buyer takes over the payments. ### What clause may the lender invoke if they find out about a "Subject To" sale? - [x] Due on sale clause - [ ] Acceleration clause - [ ] Foreclosure clause - [ ] Subordination clause > **Explanation**: The lender may invoke the due on sale clause, which requires the loan to be paid in full upon the sale or transfer of the property. ### In a "Subject To" transaction, the buyer makes payments on: - [x] The existing mortgage - [ ] A newly created loan - [ ] A lease agreement - [ ] No payment is required > **Explanation**: The buyer makes payments on the existing mortgage, not a new loan created in their name. ### What is a primary risk for buyers in a "Subject To" transaction? - [ ] Gaining equity too quickly - [x] Losing down payment if defaults occur - [ ] Decreasing property values - [ ] Rising mortgage interest rates > **Explanation**: The primary risk is losing their down payment and any escalation in the property’s equity if they default on the mortgage payments. ### Which term is specifically related to becoming personally liable for a mortgage? - [ ] Substitution of Collateral - [x] Assumption of Mortgage - [ ] Lease-Purchase Agreement - [ ] Due Diligence > **Explanation**: Assumption of mortgage is when the buyer takes personal responsibility for the mortgage debt. ### "Subject To" allows the purchase of property with: - [ ] High down payment - [ ] No equity - [x] Little upfront cash requirement - [ ] Excessive liability > **Explanation**: "Subject To" allows the purchase of property with little upfront cash required for down payment compared to traditional methods. ### In a "Subject To" transaction, who faces the credit impact if the mortgage payments are missed? - [ ] The buyer - [x] The original owner - [ ] The real estate agent - [ ] The lender > **Explanation**: The original owner's credit is affected by any missed payments because the loan remains in their name. ### What document outlines the terms of a "Subject To" transaction? - [ ] Mortgage Note - [x] Purchase Agreement - [ ] Lease - [ ] Inspection Report > **Explanation**: The purchase agreement outlines the terms of a "Subject To" transaction including responsibilities and disclosures. ### Which party benefits from mortgage relief in a "Subject To" sale? - [ ] The mortgage lender - [ ] The new buyer only - [x] The original owner - [ ] The real estate agent > **Explanation**: The original owner benefits from mortgage relief as they no longer need to make payments, although they remain liable for the loan. ### What kind of term details loan terms such as interest rates and payment schedules without changing the property's rights? - [ ] Equity Reduction Clause - [ ] Personal Guarantee - [x] Existing Mortgage Terms - [ ] Balloon Payment > **Explanation**: Existing mortgage terms refer to the unchanged conditions (interest rates, schedules) that remain regardless of the property sale deeds.