Here is our FAQ page about creative
and subject-to financing:
Q: What is subject-to financing? A: Subject-to financing means a buyer essentially takes over the seller’s remaining mortgage balance without making it official with the lender. It’s a popular strategy among real estate investors. When interest rates rise, it may also be an attractive financing option for general homebuyers.
Q: What are the benefits of subject-to financing?
A: The biggest perk of buying subject-to real estate is that it reduces the costs to buy the home. There are no closing costs, origination fees, broker commissions, or other costs. For most homebuyers, the primary reason for buying subject-to properties is to take over the seller’s existing interest rate.
Q: What is creative financing?
A: Creative financing for real estate comes into play when you don’t have the credit or collateral to qualify for a bank loan. Many investors also prefer creative financing options when interest rates are high. Using a creative method for obtaining financing means you go to alternate sources to get the money you need to do a real estate transaction.
Q: What are some examples of creative financing tools?
A: Some examples of creative financing tools include seller financing, private loans, self-directed IRA loans, lease options, and more.
Q: How will I know the mortgage payment will get paid on time?
A: We set up a third-party servicing company to withdraw money from our account and make direct payments to the parties involved. For a subject-to this would be a payment to the bank for the mortgage and then a payment for their equity. Setting up a third-party servicing
Q: What happens if you miss a payment?
A: We would use a Deed in Lieu pre-signed and held at the servicing company. The house is effectively transferred back in the seller's name if the buyer defaults over a 30-day period. The seller in this situation would inherit the property back and benefit from any and all loan paydown payments, improvements made to the property, and appreciation that the property has seen. The seller could then sell the property again for even more money if they didn’t want to keep it.
Q: Who is responsible if there are repairs or maintenance needed on the property?
A: The seller would not be responsible for any repairs or maintenance on the property after the deed is transferred. The person responsible for any repairs or maintenance would be whoever is on the deed of the property. Since the seller’s name would only remain on the mortgage and the deed would change into the buyer's name, then the buyer would be responsible for all of the repairs and maintenance.
Q: How are utilities and insurance handled?
A: We will have our insurance agent replace your current policy with our policy with the sellers added as an additional insured. So not only are we on the insurance policy but you will be on the insurance as well. We would swap the utilities into our name.
Q: Won’t this affect my Debt-To-Income to buy another property?
A-1: For Conventional and FHA loans, we can use a payment statement from the servicing company to show a lender that the loan is being serviced by someone else. After 12 months. 100% of the mortgage is removed from their DTI.
A-2: If you have a VA loan, the amount you can purchase on your next home would depend on how much entitlement you have remaining. If you didn’t have enough entitlement for your next property, then you can use your proceeds from the “Subject-To” sale towards the down payment needed for your next home.
Q: How does “Subject-To” affect my credit?
A: Since the loan is left in the seller's name, when the on-time payments are made by our 3rd party servicing company, the seller’s credit score is beneficially affected. The on-time payments to the lender gets reported back to the credit bureau and can significantly help someone who is looking to improve their credit score and can save the seller more money down the road to get their credit repaired.
Q: What happens if the Due-On-Sale Clause is called?
A-1: This rarely happens, but if the bank sees the deed has been transferred, they could request the remaining loan balance be paid in one lump sum because they believe the property has been sold (hence the name due on sale). . . We could do any one of the following:
A-2: We have spoken to lenders before to describe the situation and they have rescinded their request because they ultimately care about their notes performing.
A-3: Land Sale Contract - Deed stays in Seller's name but the buyer has ownership rights to the property.
A-4: Deed the property back into the seller's name and create a lease option where the purchase price is the remaining loan balance, and the monthly payment mirrors the current payment.
