How To Sell Your House Subject To
Selling Your Home in a way that allows the buyer to take over the payments on your existing loan or mortgage is known as Subject To.
Another way some investors describe Subject To can be when the deal is structured with an “assumable loan.” Here is a great resource that explains how assumable loans work.
This is a common way we buy houses when the seller is facing a tough situation, whether they are behind on payments, or just looking to sell their home. Here is a quick 60 second video that explains how to sell a house subject to:
Some of the benefits we have as the buyer to a Subject To deal, and what makes it an attractive way to buy your home is that we don’t have to come to the table with new debt to buy your house.
What Is Selling Your Home Subject To
Selling Subject To means the buyer is able to leverage the existing loan you have currently on the property. Servicing that loan, the buyer will continue making payments on the loan to the lender via a third party bonded escrow service.
This escrow service will be named in the title paperwork when selling your house subject to.
1st, 2nd, and 3rd Position on Title
You as the seller of the house are selling the home to the buyer for an agreed price and terms. Generally the buyer will be in the second position behind the mortgage company currently holding the Title on your house/property. By “selling us your house” essentially you are signing over the deed to us legally with a Title & Escrow Company, using an addendum approved by the lender.
Who Owns The House and How Deed vs Title works:
When Selling a HUD Home Subject To
Line 503 on the H1 form provides the place for existing loan(s) taken subject to: https://www.hud.gov/sites/documents/1.PDF
When Selling an FHA Home Subject To
Based on the FHA rules some homes with an FHA loan being sold may have restrictions by the HOA. An FHA mortgage allows you to sell the house as you see fit, including loan assumption or transfer. See the FHA article resource here: https://www.fha.com/fha_article?id=2737
When Selling a VA Home Subject To
Here is a great resource that explains the different options you have as someone with a house on a VA loan looking to sell your house subject to. Here is the Department of Veteran Affairs – Rights Of VA Loan Borrowers which explains assumable loans for a VA home you own on a VA loan that you want to sell: https://www.vba.va.gov/pubs/forms/26-8978.pdf
Why you might find it helpful to sell your house subject to…
Here is a real life example of how a Subject To deal would make sense for some sellers:
How Can I Sell My House ‘Subject To’ the Buyer Taking Over Payments?
Subject To can be described by the IRS as Buyers Installment Obligation. As the buyer we would be obligated to make future payments to the mortgage company on your existing mortgage loan for the property, or directly to you the seller if you are offering the buyer seller carry payment terms. Speak with a Cash Offer Faster investor now about selling your house Subject To.
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Contract price equals: The selling price, minus the mortgages, debts, and other liabilities assumed or taken by the buyer, plus the amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes.
According to the IRS, Buyers Installment Obligation can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer’s debt to you. The Title Company names the buyer, with the mortgage lender as first position on the title. Showing the buyer in the second or third position (depending on deal structure).
The Title documents will generally also name the loan amount, the monthly payment amount owed to the lender, the interest rate, who the lender that needs to be paid is, and on what day the loan payment is due each month. Closing title documents will also state which third party payment service has been chosen. Often the mortgage lender will accept payments directly from the buyer under their surety bond based on the stated addendum terms in the title doc. In those cases this eliminates the need for a third party Escrow company to handle the mortgage payments coming from the buyer to the lender.
When a third party Escrow company is chosen for the way a buyer will be handling the payment processing between the buyer and the mortgage lender this third party payment processing service also carries a surety bond. The surety bond held by the third party Escrow service is what protects the lender, seller, and buyer, in the Subject To deal for the remaining balance owed on the mortgage.
Resource link to the IRS: Installment Sale and How Installment Obligations Work
IRS Recources: https://www.irs.gov/publications/p936#en_US_2023_publink1000229992
What is a Wraparound Mortgage: https://www.irs.gov/publications/p936#en_US_2023_publink1000229896
Selling Any Home Subject To
So let’s say you owe $260,000 on a house and it is worth $275,000. You are behind on payments and there is another $5000 to $7500 owed in late payments. The monthly payment amount for the loan is $2,100 per month and the house could rent for that price or slightly more.
Low Interest Rates Attract Buyers To Purchase Your House Subject To
If your interest rate is low this can be an attractive subject to deal, if the seller and the buyer can agree on terms that make sense. In most cases the seller can get money at closing for selling the house and be able to then walk away. The buyer can benefit from a better than current market interest rate by taking over an existing loan already in place from you the seller, pending lender approval. SELL YOUR HOUSE QUICKLY to a Cash Home Buyer at Cash Offer Faster WE BUY HOUSES SUBJECT TO.
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How Assumable Loans Allow For Subject To & Seller Carry
Generally FHA Loans are assumable as long as the lender approves the sale. VA Loans are assumable as well. In some cases you may have a tough lender that does not want to negotiate. However, often we find that a lender speaking with a buyer and seller actively seeking a solution benefits all parties. The lender would rather not have the loan go default, causing them to lose out on payments and interest, and forcing them to seek foreclosure as the next-step process to move forward.
Lenders that understand it is a common way to sell a house subject to with a VA loan or an FHA loan and they also know that Title Companies do it often. Surety Bonds are there for protecting each party in the deal.
Getting Lender Approval To Sell Your House Subject To
We will speak with you and negotiate with the mortgage company on your behalf, when/if you would like us to be authorized to do so regarding the purchase of your house, the loan amount, interest rate, terms the lender will agree-to in the subject to transaction, any liens, back payments, or past due taxes owed. We can also speak with you and the lender together on a call if that is the easiest way for you. Having authorization can allow us to request the payment history and what is owed on the current mortgage statement.
Often times the seller is behind on the payment(s) and they ask that we get on a call together with the lender to discuss options for taking over the loan and paying off the past due payments owed to make the mortgage current. We are happy to do so exploring the options the lender is willing to entertain if we come to the table with an offer they can agree to. Every lender has preferences.
We work with you the seller, along with your lender, in as much or as little capacity as you need us to be engaged with them.
Title Companies, Lenders, and Addendums
The title company and escrow service payment facilitators chosen in our deals are licensed and bonded. We want the lender to feel good about the terms of the deal. Additionally, we look to structure each deal according to their acceptable methods to find common ground. Working with Title Companies, Lenders, Escrow Services, and with you the seller to make a deal happen.
This is how you sell your house subject to.
Doing so can make it a win for them as the lender, a win for you as the seller, and a win for the buyer too. Many times the lender will elect to accept payments directly from the buyer and have both the seller and buyer stay on title with the lender in first position. Leaving the seller in second position, and the buyer in third position or vise versa. There are also times when the lender would prefer if the buyer is a Trust and both the seller and buyer are members in the Trust. In almost all cases the lender will require a surety bond outside their own to be structured into the addendum of the deal.
What Is An Addendum
An addendum is an additional document that gets added to the purchase and sale agreement. The document will include any additional information or requests that the buyer, seller, and lender agree to. The addendum in our case will state that the buyer is purchasing the property/house from the seller subject to taking over the existing payments and the current loan terms.
Almost always the lender will remain in the first position. The escrow company or lender will agree to hold a bond and be named on the addendum to facilitate the payment processing on behalf of the buyer for the seller, to the lender.
IF YOU NEED TO SELL YOUR HOUSE with an FHA loan, or Sell your house Subject To with a VA loan, give us a call to speak with an investor at Cash Offer Faster.
Similar to how gap insurance would work when a car gets wrecked or stolen. The gap coverage is what pays off the loan on a totaled car. Having a surety bond included in the addendum protects the parties in the transaction until the loan payment is settled in full. Or, in the event of buyer default.
Why having a surety bond as a part of the deal makes sense in many cases…
Having a surety bond as part of the agreement provides the protection that if a buyer defaults on the loan the mortgage will be paid. This is a helpful site that explains how surety bonds work. The surety bond protects the Title Company since they may require a hold harmless be signed. It also protects the lender, the seller, and the buyer as well.
The surety bond provides assurance that the lender is paid. Even if the buyer is to default on the payments before the completion date of the loan terms.
Here is a list of licensed companies that can issue surety bonds: https://www.fiscal.treasury.gov/surety-bonds/
JW Surety Bonds is licensed to issue surety bonds in all 50 states. Lenders that we have done deals with in the past who are open to creative deal structures will generally require a surety bond. This comes outside their own bond so they can also relieve themselves of the liability in the event of default. All licensed lenders do carry their own separate surety bond by law to protect the people buying homes that they would normally lend to in traditional origination loans, like the one the seller is in.
Here is a list of Surety Bond Types: https://www.jwsuretybonds.com/license-bonds/consumer-finance-loan-company-bond
How A Bond For Deed works to protect the seller:
Also commonly referred to in some states as a Contract For Deed. A Contract for deed can be considered a special type of real estate contract in which the seller provides funds to the buyer to purchase the property at an agreed price and terms. The reverse can also be true in which the buyer provides funds to the seller at the close of escrow.
Escrow Specialists: https://www.escrowspecialists.com/
Escrow Specialists is a service company whose principal role is to act as a third party between a buyer and seller/lender. Acting as an impartial party in collecting payments, amortizing, making disbursements, holding original documents and following the exact terms of the contract between the two parties.
EscroServ.com, Escrow Services, Inc., has a wonderful explanation of “What is a Bond for Deed.”
https://www.escroserv.com/news/bond-for-deed-information/what-is-a-bond-for-deed.htm