Could you help explain "Subject to"

[Dakota Mivshek]

Hi There,

Question for you all. A house on my street that I really have always liked is currently on zillow under "pre-foreclosure." If I were to approach the owner regarding a sale to me, what are my options here?

If I buy the place "subject to", thus taking over the loan, how does the bank he was using for his mortgage respond? Any initial help surrounding this topic would be helpful - the owner just wants out. 

[William Hochstedler]

In situations like this, investors take ownership of the property without the bank's blessing.

Subject to existing financing (Sub2) are usually done with a quit claim deed (which gives the borrower/seller no security or recourse if you don't make payments) or with an All-Inclusive Trust Deed (which gives the borrower/seller recourse in the form of foreclosure if you default).

Almost no loans are assumable and you would still have to qualify like you would on a new loan. This is rarely considered a Sub2 strategy because it is not really existing financing.

In order for the banks to protect themselves from this kind of sale, the existing loan has a due on sale clause in the terms.  This means that the bank, upon discovery of a sale, may choose to accelerate the loan and call it due in full.  Although uncommon because banks tend to be happy when they're getting paid, this is a very real risk for you the buyer.  Do some searching on "due on sale" and "Garn St-Germain". 

Because of the risks associated with the due on sale clause, many investors plan near-term exit strategies when acquiring properties this way.

In the case of a pre-foreclosure, you would come up with enough cash to reinstate the loan, take title to the property and start making future payments.  In many pre-foreclosure cases, this reinstatement fee can be substantial.

There is a benefit to the borrower with this arrangement.  Instead of having a foreclosure on their credit report, they will reflect performing on the mortgage and you, by making timely payments, can help them improve their credit and get back on their feet again.