|Beauty of "Subject To" Mortgages
(Book excerpt from "The TurnKey Investor's 'Subject To' Mortgage Handbook")
The idea of buying
investment property without having to get a new loan is a very attractive
idea. One way this occurs is that you take title to a property but
leave your seller’s existing loan in place.
This particular method of acquiring property is the essence of a little-known
technique of buying and financing property with a “subject
to” mortgage , a form of seller-financing.
There are many benefits
to buying property with the “subject
to” mortgage technique, including:
- No Qualification Process
- Fast Closings
- No Loan Costs
- No Impact on Borrowing Power
- Negative Events Do Not Appear on Our Credit Report
- Profitably Buy
Little or “No Equity” Properties
Credit is Often Improved
- Lender Losses are Minimized
When we buy property
with a “subject to” mortgage, we are
not “asking permission” from a lender as to whether we can
buy the property and qualify for a loan. Neither are we trying to formally “assume” the
We are simply making alternative offers to sellers (who already went
through a loan qualification process) for us to step in, take over their
position, and begin making payments. In effect, we bypass the normally
cumbersome loan qualification process.
Because we are simply
assuming the seller’s position with the
loan, we are able to do quick closings. Often, all that is required for
a closing on such properties is for us to do a title check, verify the
loan status with the lender, and then set up an appointment with a real
estate attorney (or title company) to complete the paperwork and close
the deal. Typically, all these events can happen within a week.
We use this benefit in our negotiations with our sellers who may want
to move out and on with their lives quickly.
Buying investment property typically requires getting new financing,
which often means qualifying for a new loan. When a lender agrees to
provide financing to a borrower, theses loans and closing costs can add
several thousand dollars to the purchase price of the property. Such
costs can include fees for appraisals, loan underwriting, attorneys,
couriers, surveys, insurance, and inspections. The list of the fees to
be paid for a new loan can be quite long.
Buying property with
a “subject to” mortgage
eliminates the loan fees and closing costs because they were already
paid by the seller when they originally bought the property. The only
exception to this no-fee approach is that when we close with our sellers,
we pay our real estate attorney a fee to do our closings.
Impact on Borrowing Power
A common challenge
for many real estate investors is the amount of financing they can
qualify for as their portfolio grows. With every new investment loan,
borrowing power generally weakens.
Ultimately, many investors will encounter a time when getting new investment
properties with their own borrowing power becomes very difficult.
with a “subject to” mortgage bypasses
any impact on our credit reports and our borrowing power. The reason
is that the loan continues to appear on the seller’s credit report
until we ultimately pay off and satisfy the loan.
As such, there is
not a credit limit to how many properties we can buy with a “subject to” mortgage.
Events Do Not Appear on Our Credit Report
I almost hesitate to bring this benefit up because this can be taken
out of context, but I will do so in the interest of being complete. It
is a benefit I hope no one -- including ourselves -- ever takes
In the highly improbable
event that we lost a property to foreclosure, our credit reports would
not show any negative consequences. To a lesser degree, even late payments
and other negative performance-related issues will not appear on our
credit reports. If a foreclosure occurs, it will appear on the seller’s
At this point, I would like to emphatically point out that this benefit
can only be used under financially or economically catastrophic events.
Like life insurance, this is a benefit you hope to never use in your
I do not in any way,
shape, or form, condone buying a property with a “subject to” mortgage
if there is any question or concern about whether you can make the
payments. This is especially true if you are buying from a seller who
has marginal to excellent credit.
with a “subject to” mortgage is just
as serious a business, if not more so, as buying property with your own
credit. If you ruin your own credit, that is one thing – but ruining
another person’s credit is a burden being placed on someone else.
Yet if an economic
catastrophe occurs, you can take some small comfort that your credit
will not be ruined by the properties you bought with a “subject to” mortgage.
Buy Little or “No Equity” Properties
One of our favorite
ways to separate ourselves from many buyers in our market is that we
are able to profitably buy little or “no
equity” properties. Typically, sellers with no equity in their
property have a difficult time selling them. In our local area, it is
quite common for many sellers who have owned their homes for three years
or less to have little or no equity in their property. Clearly, we are
nowhere near California cities or any of the other places where property
appreciates very quickly.
When a seller wants to mortgage a property with little or no equity,
very few real estate agents are willing to work with sellers of those
properties because their sales commissions often come from the proceeds
of a sale. If there is little or no equity, the only way a real estate
agent could be paid is if a seller is willing to pay the commission out
of pocket. Needless to say, few sellers are inclined or are prepared
to pay such a large sales commission themselves.
As investors buying for profit, we would not normally get new financing
to buy little or no equity properties. Because a new loan would add thousands
of dollars to the purchase price (making it over-priced), it would make
little sense to go through the trouble or costs to buy these types of
However, buying with
a “subject to” mortgage
increases our willingness and the overall desirability of the property
because it allows us to step into those properties with great ease,
little out of pocket costs, and no loan qualification process.
Credit is Often Improved
Often, we buy from sellers with a troubled payment record. They frequently
have loan arrearages they cannot pay. In some situations, foreclosure
is imminent. When we step in to buy these properties, we pay the arrearage
and reinstate the loan.
Once we reinstate
the loan, we begin to make regular monthly payments to the seller’s account. From the lender’s point of view,
the account has “miraculously” improved. From the seller’s
point of view, their troubled credit “magically” begins improving
as their delinquent account and arrearage disappears and the account
becomes and stays current. Over a 12-month period, having a mortgage
loan that is current goes a long way to improving the seller’s
credit score and borrowing power.
And as part of our negotiations, we often tell our sellers about this
particular benefit. Not only do they sell their property quickly but
also they get their credit scores and credit records improved because
Losses are Minimized
Lenders are helped
by “subject to” mortgage
transactions. By creatively utilizing this technique, we often save
properties and loans from foreclosure action.
Foreclosure action is generally a very expensive process where many
parties lose. The borrower would clearly vacate the property and suffer
a foreclosure record. But the lender often takes business losses by paying
fees on foreclosing and managing vacant properties that have little or
Additionally, when they do finally resell the properties, they often
do not fully recover the monies they originally loaned out. These costs
are passed on to future loan customers.
By doing our part
to “save” the
properties and the accompanying loans, lenders suffer fewer losses
from foreclosure action. More importantly, they continue to have a
performing account with ongoing loan payments.
Buying and financing
investment properties with a “subject to” mortgage
has many benefits for the buyer, the seller, and the lender. A “subject
to” mortgage is not a “magical pill” to solve all buyer,
seller, or lender problems. However, it is an innovative and little-known
financing technique that, when properly utilized, provides win-win situations
to all parties.
Matthew Chan is the author of
"TurnKey Investing with Lease-Options",
"The TurnKey Investor's 'Subject To' Mortgage Handbook", and
"The TurnKey Investor's Lease-Option Documents Collection".
You may contact Matthew at 706.565.5090 or you can email him at: email@example.com.
You can also find Matthew at MatthewChan.com.
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