There is a method of buying and selling real estate by investors known as “subject to.” Most people who are not in the real estate investment field have never heard of this way of building real estate deals, because it is outside the bounds of standard real estate financing. Banks and mortgage companies despise these types of real estate deals, because it takes them out of the position of control and power over you and your property.

In a subject to transaction, a property owner signs the property deed to a buyer, without the buyer assuming the owner’s loan. The homeowner understands that the loan remains in the homeowners name and the buyer does not assume the loan, but only promises to make the homeowners loan payments on behalf of the homeowners. In other words, the buyer is taking possession of the property “subject to” the existing mortgage remaining on the property.

Is that legal? Can You Sell Your Property While There Is Still A Loan Against You? The answer is yes, you can. And this is how it works.

First, look at how a standard real estate is bought and financed. A buyer finds a property that he would like to buy. They make an offer through a real estate agent or perhaps directly to the seller, and a price is agreed upon. The buyer then contacts a bank or mortgage lender to arrange financing. Or perhaps the owner consents to the owner financing the property to the buyer. When the actual sale takes place, there are three basic documents that are put in place, a deed, a mortgage, and a note. The particular names of these documents may vary from state to state, but they are still the three basic documents that are created when it comes to a loan.

WRITING

A deed is the document that determines the real ownership of a real estate. It is the sheet of paper that describes the property and, when properly executed, transfers ownership of the property from the seller to the buyer. Once a deed is properly written, executed (signed), notarized and delivered to the buyer, the buyer is at that time, the new owner of the property.

THE NOTE

The promissory note is the instrument that defines how the buyer will repay the lender and the terms under which the repayment will be made. The note will indicate the amount of money borrowed, the interest rate paid, the number of months or years to repay the loan, and the amount owed each month. The note may contain other items, such as a balloon payment that is due in the future.

THE MORTGAGE

The mortgage is the document that places a lien on the property until the debt is paid. The mortgage generally defines the property and the encompassing language of what will happen if the promissory note is not paid off. Today’s mortgages almost always contain a “Maturity On Sale” clause, which will be discussed later.

This is how the three documents put things together. Whenever a property is sold and any type of loan is taken against the property, there are four entities that interact with each other. They are the buyer, the seller, the lender, and the property itself. The deed establishes who the real owner of the property is. Link the property to the buyer. The note tells how the loan will be repaid and links the buyer to the lender. The mortgage imposes a lien on the property and ties the lender to the property.

When a seller has a loan on a property and wants to transfer ownership of the property to another buyer, a deed is created to do so. The creation of the new deed does not affect the other two documents. The original buyer (who is now the seller) remains responsible for paying the promissory note, and the mortgage linking the lender to the property also remains in effect. In other words, the transfer of title from one owner to another has no bearing on the promissory note or mortgage. It is not illegal to transfer title to a property from one person to another while a mortgage exists. The only thing that could happen is that the lender could cancel the note and pay it immediately due to the transfer of the deed. This is the expiration-on-sale clause mentioned above.

Today it is practically impossible to obtain a loan for a property that does not have a maturity clause for sale. The maturity on sale clause is not a law, it is simply a phrase in a document that says that if you transfer ownership of the property to someone else, the lender has the right to demand full payment of the loan immediately, and if not What is paid, the lender can foreclose on the property.

In a subject to sale, when the seller transfers a deed to a new owner, he has activated the expiring property for sale. The lender may or may not know about the transfer, and even if it does, it may not act on the demand for full payment. As long as the monthly payment is being made, the lender is unlikely to cancel the loan as it is in the business of lending money and not in the real estate business. They would rather have someone take the note than foreclose on the house and then have to resell it.

So, in the end, a subject for sale can activate the expiration clause on sale, but it does not affect the promissory note or the mortgage. Even if ownership of the property is transferred to a new owner, it is not as if the new owner could go find the property and run away with it. If the new buyer defaults on his promise to make payments on the previous owner’s promissory note, the lender can still foreclose on the property through the mortgage document, regardless of who the actual owner of the property is. The lender is still secured with the property as collateral.

The Subject To method of selling and buying a property is a viable way for an owner to sell a property when the owner is in financial difficulty and is in danger of completely losing the property and destroying his credit.