Lesson 4 of 5
Subject-to and due-on-sale, honestly explained
You take title; their loan stays in their name. That is the whole risk.
9 min read
What subject-to is
Title transfers to you, the existing mortgage stays in the seller's name, and you make the payments. It works when the loan rate is good, equity is thin and the seller needs out from under the payment.
Due-on-sale is real
Nearly every mortgage lets the lender call the loan due when title transfers. It is not routinely enforced, but it can be, and rising rates make it likelier. The seller must be told this in writing, in plain words, before signing. If you would not be comfortable reading your disclosure aloud to their adult child, rewrite it.
Protect the seller
Use a servicing company so payments are documented. Keep insurance in force with the correct parties named. Give the seller online visibility of the payment history. Agree in writing what happens if you stop paying, and put a reconveyance or exit clause in it.
Know when to refuse
No, if the seller does not understand the risk. No, if they need the loan off their credit to buy their next home. No, if the payment does not cash flow. Walking away from these is the profitable decision.
Do this next
- Write your one-page due-on-sale disclosure in plain language and have an attorney review it.
- Decide your rule for when you will not do a subject-to, before a seller talks you into one.
Education only — not legal, tax or investment advice, and no promise of income. Rules differ by state; check yours and use a real estate attorney.