Buying Real Estate "Subject To" Resource

Buying a house "subject to" the existing mortgage occurs when the buyer takes over the mortgage payments of the seller. It is a form of financing that is especially attractive to the buyer for two main reasons:

1. Buyer doesn't have to apply for a new loan therefore he/she doesn't have to pay loan closing costs.
    
2. The mortgage remains in the name of the seller, so the seller is technically still responsible for the mortgage. That mortgage remains in the seller’s credit file and doesn’t affect the buyer’s credit.

To avoid this practice, banks usually include in their loan contracts a "due on sale" clause, which allows them to call the full amount of the loan due as soon as the house is sold. In reality, as long as payments continue to come in punctually and in full, regardless of who is actually making them, banks are not likely to find out if the house has been sold, or they may simply not put a lot of effort in enforcing the due on sale clause.

From the buyer’s point of view, selling a house subject to the existing mortgage is a risky proposition, because if the buyer is not able or willing to make the monthly loan payments, it will negatively affect the seller’s credit (since the loan is still in their name). For this reason, it is usually individuals facing foreclosure or who are experiencing an extremely tight real estate market the only ones who take the risk of selling their house “subject to”.

In the particular case of individuals facing foreclosure, the “subject to” technique can actually be beneficial. If the buyer acts in good faith and makes the payments punctually, it can not only help the seller avoid foreclosure, but the regular payments will also help them rebuild their credit.