What is a Subject-To Transaction?
A "subject-to" transaction occurs when a buyer takes over payments on an existing mortgage without formally assuming the loan. The existing loan remains in the seller's name, but the buyer makes the payments. The title transfers to the buyer while the original loan stays on the seller's credit and remains their legal responsibility.
How Subject-To Transactions Work
In a typical subject-to arrangement:
- The buyer acquires title to the property from the seller
- The existing mortgage remains in the seller's name
- The buyer makes monthly payments directly to the lender
- The buyer may pay the seller an upfront payment for taking over the property
Key Considerations
Due-on-Sale Clause Risk
Most conventional mortgages contain a "due-on-sale" clause, meaning the lender can call the entire loan balance due when the property is transferred. While not always exercised, this creates legal risk for both parties in subject-to transactions.
Seller's Continuing Liability
The original borrower remains legally responsible for the mortgage. If the buyer stops making payments, the seller's credit is affected and the lender can pursue the original borrower for the full balance.
Questions to Understand
- Does the mortgage contain a due-on-sale clause?
- What happens if the buyer defaults on payments?
- Who is responsible for property maintenance and taxes?
- What are the legal implications in your state?
Educational Note: This information is provided for educational purposes only. Subject-to transactions involve significant legal and financial risks. The Public Lyceum does not recommend or endorse any specific transaction structure. Consult with a real estate attorney before entering into any subject-to arrangement.