What are the Hazards of SubjectTo with FHA Loans?

[Nathan Hartmann]

I have a property under contract which I am planning to go subject to on, while performing due diligence, running title, getting pay-off, reinstatement, escrow balances and so forth I also determined that the loan is an FHA, NOT conventional. I am trying to get a feel for the risk involved with going subject to on an FHA loan versus conventional.

What are the hazards of purchasing a property Subject To an existing FHA loan? (what specifically are the increased risks versus conventional)

- FHA black list ramifications?

- Due on sale clause more likely to be evoked with FHA?

- Title companies do not appear willing to issue title insurance or orchestrate closings on these loans... I have a title report showing that the only lien is the original mortgage

- If I flip the property or refinance the FHA loan out in a year to hold the property as a long term rental does that drop the risks substantially as then this property would be Subject To for a short time frame.

The deal gets too tight for comfort if I were to purchase the property outright with Hard Money, hence the Subject To angle.

Input is appreciated!

[Mark Collard]

@Nathan Hartmann - here you go buddy... my best efforts to inform you, enlighten you and empower you around this particular subject to, and some resources.

First, I always recommend you find a real estate attorney that can help you navigate transactions like this, and at the same time, it's super important to be aware of any real estate professional and their opinions... be sure to find someone that understands your methods, motivations and your direction in real estate, and be sure they empower your decision making... if they are FEAR based on DOOMSDAY opinionated, I would choose out. I have a great resource for a guy, I think he's in Houston, his name is David J. Willis, attorney, and his website is one of my favorite for all things creative real estate in Texas, including Subject to.    LoneStarLandLaw.com 

Second, let's discuss the subject to transaction, specifically for this FHA loan. So, on a basic level, FHA and conventional "subject to"s work the same, but some of the things to consider are:

- hazard insurance - there are differing opinions on insurance fraud on an FHA since it's a federally insured loan. Without going into it, I'd say discuss with your attorney any possible concerns on this.

- due on sale clause - the due on sale clause is mostly the same for most lenders....GOVY loans or otherwise, so that's not really a big deal. Most lenders are NOT going to call the loan due, although, I always approach all "subject to"s with an alternative exit strategy, just in case. If you read your actually NOTE and DEED OF TRUST, you'll realize the likelihood that it will be called is almost neal... although exceptions can happen.

- alternative solution could be using a title holding land trust. I learned them in the early 2000's and did NOT worry about using one for all these years. This past spring, I did my first title holding land trust on an FHA loan, and it has worked perfect. Paperwork on the 1st one was pretty intensive, but I streamlined it down from 20+ docs to less than 10, and I feel really good about it. The title holding land trust is covered by the Garn - St Germain Act

https://en.wikipedia.org/wiki/Garn%E2%80%93St._Ger...

which allows anyone to NOT breach the due on sale clause by putting their property into a trust, and thus being able to protect their asset. The benefit of this tool is to be able to then transfer the beneficiary interest of the trust to ANYONE, specifically you, and it makes it functional to make payments, deal with lenders and to have no worries about breaching the due on sale.

And, lastly to address what you asked... the insurability issue with title insurance.   Yes, title companies have licensing requirements and restrictions that inhibit their ability to insure these types of transactions, as well as they do NOT like to do them so as to not breach any regulations with their license.   One recommendation that I have for you is to speak to your title company escrow officer and sales rep, and have them get you in contact with your local or regional title insurance underwriter, and speak to them directly.  Ask them to explain their limitations on this and why, then ask for any recommended alternative solutions.    I have had great success with this technique, as our regional underwriter is in Las Vegas, and I have met with him directly which gave me great insight into his methods, and I found him to be very reasonable in giving me alternative solutions to whatever limits they have.... I won't go into the 20+ conversations we have had, but it's very empowering an insightful.

Last last, I'll say this about subject to... when you get ready to sell the property, and if it's NOT insured, you will need to have an affidavit signed by original owner(forgive me, I do NOT recall the name of it), but effectively it requires them to sign of that they have NO financial interest in the property.   I even have a 4 page "subject to" contract that disclosed and disclaimed the same from the original seller, but the title companies want the AFFIDAVIT executed anyway.    If you have an original seller that leaves town, dies, or otherwise is UNavailable, this could become a problem.  Might discuss that with underwriter, and see if they have solutions for such an issue, or if you use an attorney to have something like that signed up front, when you first consummate the transaction.

I think I'm getting long winded and wordy, so I'll leave it right there.

Hope this is helpful!   Thx, Coach Collard