Sub2 refinance concerns

[Nick Frankus]

I am looking at my first Sub2 deal and have a question. As long as the title transfers to me at closing and I buy subject to the existing financing, is there any reason a lender would have a problem refinancing the house and paying off the underlying loans which are in the seller's name?

My plan is to purchase the house subject to the existing financing (I take title and pay sellers loan payments), rehab the house with cash, then refinance and potentially cash out my rehab money if the numbers are good enough. What are the problems I should be aware of in this case?

[Belinda Lopez]

The only issue I've run into is in trying to get the final payoff from the original mortgage company sent to the Title company for the refi closing. Usually when there is a sale, they can request it but since the property has already been sold, there is no authorization for the 1st mortgage company to release the info. There are a few ways around this:

1. Have the seller do a Power of Attorney to you for the property. The POA is specific to the property and should also let you order the final payoff.
2. Also make sure the seller sends in a "Release of Information" authorization so you can talk directly to the mortgage holder about the account. Do this right away.
3. Have the seller change the mailing address on the account to wherever you are receiving the mail. If there are any notices concerning the mortgage (insurance, escrow, etc.) you need to be authorized to receive those items. Also, lately I've ordered payoffs on Subject To properties and they were mailed to the house mailing address and the mortgage companies refused to send them elsewhere.

If you remain on good terms with the seller, they can assist in getting the mortgage company to send documents and final payoff to the Title you will be using for the refi closing. Let the Title company handle the payoff to the 1st mortgage company and your new lender will also probably getting a policy to cover them at this time as well.

Escrow! Not sure exactly how this is handled in a Subject To, when you refi under your name b/c the old mortgage and if there is an escrow account, it's possible that any excess funds at payoff may be refunded to the original mortgagee and not you! I've heard of others who put in language in their original purchase saying they get those funds instead of the 1st seller but this may not be the case. Depending on what time of the year you end up refinancing, this could be a considerable amount.

We are refinancing one right now and are waiting until the end of the month when we know the original mortgage company has just paid the taxes. Did I mention insurance? Same thing there, if insurance is part of the escrow, then any premium refund may go to the original owner and not you. They might also need to send in a cancellation form to the insurance company once the first mortgage is paid off.