Are you considering purchasing real estate through a subject-to or seller financing transaction? These alternative methods offer unique opportunities for buyers and sellers alike. In this blog post, we’ll answer some frequently asked questions about subject-to and seller financing, providing you with valuable insights into these creative approaches to real estate transactions. Let’s dive in and explore how subject-to and seller financing can benefit you!

Ensuring Timely Mortgage Payments

One concern many buyers have when considering a subject-to transaction is how to ensure timely mortgage payments. Rest assured, we take this seriously. We establish a third-party servicing company that handles payments directly to the parties involved. Whether it’s the mortgage payment to the bank or the equity payment to the seller, our dedicated servicing company guarantees a seamless and reliable payment process. Moreover, this arrangement serves as tangible proof of your consistent payment history, benefitting both you and the seller.

Dealing with Missed Payments

What happens if, despite our best intentions, a payment is missed? We have a solution in place to address this situation. We use a pre-signed Deed in Lieu, which is held by the servicing company. If a buyer defaults for over 45 days, the house effectively transfers back to the seller’s name. As the seller, you can then reap the benefits of any loan paydown payments, property improvements, and appreciation that has occurred during the buyer’s occupancy. Furthermore, you have the option to sell the property again for a potentially higher price if you decide not to keep it.

Responsibility for Repairs and Maintenance

When it comes to repairs and maintenance, you might be wondering who assumes responsibility after the deed is transferred. In a subject-to transaction, the seller is relieved of any obligations regarding repairs or maintenance once the deed is transferred. The person listed on the deed, which will be the buyer, becomes responsible for all necessary upkeep. So, as a buyer, you’ll have full control and ownership of the property, including the associated responsibilities.

Handling Utilities and Insurance

Utility and insurance matters can be complex during these types of transactions. However, we have a straightforward process in place. We work with our insurance agent to replace your current policy with our own policy, with the added benefit of listing you as an additional insured. This ensures that both parties are protected. Additionally, we handle the transfer of utilities into our name, simplifying the administrative tasks involved in the transition.

Debt-to-Income Considerations

If you’re contemplating purchasing another property in the future, you may be concerned about the potential impact on your debt-to-income (DTI) ratio. Fear not! For Conventional and FHA loans, we can provide a payment statement from the servicing company as evidence that the loan is being serviced by a third party. After 12 months, 100% of the mortgage is removed from your DTI calculation. As for VA loans, the remaining entitlement will determine your eligibility to purchase another property. If needed, you can utilize the proceeds from the subject-to sale to contribute to the down payment on your next home.

Credit Implications of Subject-To

You might be curious about how a subject-to transaction affects your credit. Since the loan remains in the seller’s name, making timely payments can significantly benefit their credit score. By consistently making on-time payments, you positively contribute to the seller’s credit history. Moreover, these payments are reported to the credit bureau, providing you with an opportunity to improve your credit score. This mutually beneficial arrangement can also save the seller money in the long run when seeking credit repair.

Dealing with the Due-On-Sale Clause

While rare, the activation of the Due-On-Sale Clause is a concern for some participants in subject-to transactions. If the bank identifies a transfer of the deed, they may request the remaining loan balance be paid in one lump sum. However, we have several strategies to address this situation. Firstly, we have successfully communicated with lenders before, explaining the unique circumstances, resulting in the rescission of their request. Alternatively, we can employ a Land Sale Contract, where the deed remains in the seller’s name while the buyer has ownership rights to the property. Another option is to deed the property back into the seller’s name and establish a lease option agreement, with the remaining loan balance serving as the purchase price and the monthly payment mirroring the current payment.

Conclusion

Subject-to and seller financing present exciting opportunities for buyers and sellers in real estate transactions. By understanding the intricacies and addressing common concerns through innovative strategies, we can create successful hybrid deals. From ensuring timely mortgage payments and handling repairs to navigating credit implications and the Due-On-Sale Clause, subject-to and seller financing provide flexible solutions for those looking to maximize their real estate investments.