Day: October 21, 2023

Nonqualified Assumptions or Subject-TO FAQ?s
Thanks again for chatting with me regarding this property. It’s nice to speak to an agent that is open to creative options to help their sellers sell their home. Please see below for what Subject-To means.

“Subject-To” is a way of purchasing real estate where the buyer takes title to the property, but the existing loan stays in the name of the seller. In other words, “Subject- To” the existing financing. The buyer now controls the property and makes the mortgage payments on the seller’s existing mortgage.

1. Is this legal?
Yes, Fill-able HUD-1 This is a standard form that title/escrow companies
and attorneys use to build settlement statements. Please note lines 203 and 503. CFR-2012-title24-vol5-part3500-appA.pdf (govinfo.gov) This link is the instructions to fill out the HUD1. Note this is a Code of Federal Regulation (CFR) document. Page 396, second paragraph states: “Line 203 is used for cases in which the Borrower is assuming or taking title subject to an existing loan or lien on the property.” Would the federal government put this in the Code of Federal Regulation if it wasn?t legal?

• How willI know the mortgage payment will get paid on time?
  We set up a third-party servicing company to withdraw money from our account and make direct payments to the mortgage. Setting up a third party servicer also shows proof that payments are being made by the buyer when the seller goes to wipe out their Debt-To-Income on this property with any other lender and double dip.

• What happens if you (BUYER) miss a payment?
  We would use a Deed in Lieu pre-signed and held at the servicing company. The house is effectively transferred back in the sellers name if the buyer defaults. 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.

• Who is responsible if there are repairs or maintenance needed on the property? 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 buyers name, then the buyer would be responsible for all of the repairs and maintenance.

• Won’t this affect my Debt-To-Income to buy another property?
  For Conventional and FHA loans, we pre-pay 1 month of a lease
  agreement upfront and the lender that we use is typically able to wipe off 75% of the seller?s DTI right then. After 1 year of on-time payments, 100% of the DTI should be removed from the seller’s name. All you will need to do is show your lender that on-time payments are being made by us for the past year.
  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.

• How does Subject-To affect my credit?
  Since the loan is left in the seller’s name, when the on-time payments are made, 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.

• How long do you plan on keeping the mortgage in the sellers name?
  The short answer is forever. What I mean by forever is that we always tell sellers and agents to plan on keeping your name on the mortgage until the mortgage balance is paid off. However, I can tell you that my partners and I on average keep a property for about 7 years. The average homeowner stays in a house for about 7 years and it’s no different for investors.

• What happens if the Due-On-Sale Clause is called?
  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:
  i. We have spoken to lenders before to describe the situation and they have rescinded their request
  because they ultimately care about their notes performing.
  ii. We could also refinance or sell the property at that point to pay the bank back the mortgage balance.