How to structure a subject to loan with a downpayment (house is on market)

[Lilly Fang]

I found several houses on the market with prices too high to sell. However, the seller has a large mortgage with 3% rate.

For example, a house is listed at 500k, with a 380k mortgage of 3%. Seller bought it at 480k in 2021. I would like to take over the 380k mortgage at 3% and pay the difference in cash, then I still have positive cash flow when renting it out. What's the cost and paperwork associated with the subject to loan besides the usual closing cost? 

I also heard if the seller one day decides to take the house back, I may lose the house? Anyway to prevent this happen? Do I also lose my downpayment if this happens?

[Jacob Beg]

You can do a quit claim deed, where you are on the title and he is not, however, he still have a liability, that is, the mortgage is still under his name. There is an acceleration clause is most deed of trusts, that is, his mortgage document that calls for a full payment of a mortgage if the title is transferred in this manner, but people do it all the time and accept that is the mortgagee/lender ever exercises this clause then you'll just have to refinance the property and since you were paying the mortgage and have proof, you should have no difficulty in refinancing the property. 

Of course, you are putting a lot of cash in the deal so you need to be comfortable with the property itself. I would negotiate the price first. The seller may not be OK with letting you "handle" the mortgage, because you could go in default and ruin his credit. He may take the view that since you are putting a lot of money down you'd not screw up. 

You'd want to have a notarized document giving you permission to make any inquiries on the mortgage. Because you may have to call the lenderat some point to speak about the mortgage for whatever reason. You'd also want to speak to a title company to make sure tile is marketable and whether there is any scope for you get title insurance, in case the title ever gets challenged a decade from now. 

The cost isn't all the much because it's just drafting straightforward contract. It's a case of tying all the lose ends. Even then, some ends you won't be able to tie (such as a acceleration clause), however, in practice, the lender barely triggers the escalation clause. Hope this helps.