Subject-To Financing: How to Buy Real Estate Subject to the Existing Mortgage

Subject-to financing is one of the most powerful—and most misunderstood—creative financing strategies in real estate. In a subject-to deal, you buy a property and take over the seller's existing mortgage payments without formally assuming the loan. The loan stays in the seller's name. You get the deed.

When it works, subject-to lets you acquire properties with little or no money down, at interest rates potentially far below today's market, with no bank qualification required. When it's done wrong, it can result in loan acceleration, legal disputes, and financial disaster.

This guide explains exactly how subject-to works, when it makes sense, and how to execute it properly.

What Does "Subject To" Mean?

When you buy a property "subject to" the existing mortgage, you're purchasing the property with the understanding that the seller's mortgage will remain in place. You take title to the property via deed, but the loan is not paid off at closing. Instead, you make the monthly payments on the seller's loan.

What transfers: Ownership (the deed) What stays the same: The mortgage, in the seller's name, with the original terms

The seller is still technically liable for the mortgage. Their name is on the loan. But you own the property and control the payments.

Why Would a Seller Agree to This?

Sellers agree to subject-to deals when they're in distress:

• Behind on payments. Foreclosure is looming and they need someone to take over.
• Underwater. They owe more than the property is worth (or close to it), so a traditional sale would require bringing cash to closing.
• Relocating urgently. Job transfer, divorce, military deployment—they need out fast.
• Tired landlords. They can't manage the property, can't sell it for what they owe, and just want the burden transferred.
• Expired listings. The property has been on the market for months with no buyers at the listed price.

In each case, the seller's alternative is often worse: foreclosure, short sale, or continuing to bleed money on a property they can't afford.

How a Subject-To Deal Works Step by Step

Step 1: Find a Motivated Seller

Subject-to deals don't work with sellers who have lots of equity and no urgency. You're looking for sellers whose primary motivation is relief from the payment obligation, not maximum sale price.

Sources:

• [Pre-foreclosure](/blog/buying-foreclosure-guide) lists (lis pendens filings at the county courthouse)
• Expired MLS listings
• "For Rent" signs (tired landlords)
• Direct mail to absentee owners with high loan-to-value ratios
• [Driving for dollars](/blog/driving-for-dollars-guide) (distressed properties)
• Probate situations where heirs inherit a mortgaged property

Step 2: Analyze the Existing Mortgage

Before you agree to anything, you need complete information about the seller's loan:

• Current loan balance: How much is owed?
• Interest rate: Fixed or adjustable? What rate?
• Monthly payment: PITI (principal, interest, taxes, insurance)
• Loan type: Conventional, FHA, VA, USDA?
• Months remaining: How much time is left on the loan?
• Payment status: Current, 30 days late, 60 days late, in foreclosure?
• Due-on-sale clause: Present in virtually all modern mortgages (more on this below)

Critical: Get a copy of the seller's most recent mortgage statement and the original note and mortgage documents. Verify independently with the servicer if possible.

Step 3: Negotiate the Terms

In a subject-to deal, you're negotiating:

• Purchase price: Typically the remaining loan balance plus any cash to the seller
• Cash to seller: Often $0–$5,000 for truly distressed sellers. Some sellers just want out clean.
• Back payments: If the seller is behind, you'll need to bring the loan current. This can be $3,000–$20,000+ depending on how far behind they are.
• Remaining equity: If the property is worth more than the loan balance, how do you compensate the seller? Options include a small cash payment at closing, a promissory note for the difference, or a share of future profits.

Example deal:

• Property value: $285,000
• Existing mortgage balance: $248,000
• Interest rate: 3.75% (originated in 2021)
• Monthly PITI: $1,580
• Seller is 2 months behind ($3,160 in arrears)
• Cash to seller: $2,000

Your total out-of-pocket: $5,160 ($3,160 to cure arrears + $2,000 to seller) You now control a $285,000 property with a 3.75% mortgage—while today's market rate is 7%+.

Step 4: Close the Transaction

Subject-to closings require specific [documentation](/blog/heloc-documentation-requirements):

1. Purchase and sale agreement with subject-to language clearly stating the buyer is taking title subject to the existing mortgage
2. Warranty deed (or [grant deed](/blog/how-to-read-property-deed)) transferring ownership from seller to buyer
3. Authorization to release information allowing you to communicate with the seller's loan servicer
4. Seller disclosure acknowledging the seller understands the loan remains in their name and the due-on-sale risk
5. Power of attorney (limited) for mortgage-related communications (optional but useful)
6. Title search and title insurance to verify lien positions and protect your ownership

Many subject-to closings are handled by real estate attorneys rather than title companies, as some title companies are unfamiliar with or refuse to handle subject-to transactions.

Step 5: Manage the Property and Payments

After closing:

• Set up automatic payments to the seller's mortgage servicer
• Transfer property insurance to your name (or add yourself as an additional insured) with the existing lender as loss payee
• Update the property tax billing to your address
• If renting: place tenants and manage the property
• If flipping: renovate and sell

The Due-on-Sale Clause: The Big Risk

Nearly every mortgage originated since 1982 contains a due-on-sale clause. This clause gives the lender the right to demand full repayment of the loan if the property is sold or transferred without the lender's consent.

The Garn-St. Germain Act

The federal Garn-St. Germain Depository Institutions Act of 1982 prohibits lenders from exercising the due-on-sale clause in certain situations:

• Transfer to a spouse or children
• Transfer resulting from death of the borrower
• Transfer to a living trust where the borrower is a beneficiary
• Transfer resulting from divorce or separation
• Leasing the property (with some restrictions on term length)

A standard subject-to sale to an unrelated third party is NOT protected by Garn-St. Germain. The lender can legally call the loan due.

How Real Is the Risk?

This is the most debated topic in subject-to investing. Here's what actually happens in practice:

Lenders rarely call loans due on performing mortgages. If the payments are being made on time, the lender is getting what they want—regular payments with interest. Initiating acceleration is expensive and creates a non-performing asset on their books.

However, the risk is not zero:

• If the lender discovers the transfer (through an insurance change, tax record update, or other trigger), they can send an acceleration letter
• FHA and VA loans have additional government oversight, and transfers may attract more scrutiny
• If interest rates are high and the existing rate is low, the lender has financial incentive to call the loan (they could redeploy capital at higher rates)
• Servicer mergers, portfolio audits, and AI-driven monitoring are making detection more likely over time

Mitigating Due-on-Sale Risk

1. Keep payments current. A performing loan is an asset to the lender. Don't give them a reason to look closely.
2. Use a land trust. Transfer the property into a land trust with the seller as initial beneficiary, then assign the beneficial interest to yourself. Land trusts may not trigger due-on-sale clauses under Garn-St. Germain's trust exemption, though this interpretation is debated.
3. Maintain insurance continuity. Don't cancel the seller's insurance and get a new policy that triggers a lender notification. Work with an insurance agent who understands subject-to transactions.
4. Have a backup plan. If the lender calls the loan due, you need to be able to refinance or sell the property within 30–90 days. Don't do subject-to deals unless you have an exit strategy.
5. Avoid FHA and VA loans if possible. These government-backed loans carry additional restrictions and monitoring. Conventional loans are cleaner for subject-to transactions.

Subject-To Deal Structures

Structure 1: Straight Subject-To

You buy the property, take over the payments, and hold or rent it. The mortgage stays in place until you sell or refinance.

Best for: Buy-and-hold investors who want the benefit of a low interest rate for years.

Structure 2: Subject-To + [Seller Financing](/blog/seller-financing-guide) for Equity

The seller has equity above the mortgage balance. You take the property subject to the existing mortgage and give the seller a [second mortgage](/blog/best-heloc-lenders-2026) (seller carryback) for the equity portion.

Example:

• Property value: $320,000
• First mortgage: $240,000 at 4.25%
• Seller carryback (second mortgage): $50,000 at 6%, interest-only for 5 years
• Cash to seller at closing: $5,000

Total acquisition: $295,000 for a $320,000 property, with a blended interest rate far below market.

Structure 3: Subject-To + Lease Option

You buy the property subject-to, then sell it on a lease-option to a tenant-buyer. The tenant-buyer pays you an option fee ($5,000–$15,000), above-market rent, and has the option to buy at a predetermined price within 1–3 years.

Best for: Creating [cash flow](/blog/net-operating-income-guide) and a profitable exit without bank financing at any stage.

Structure 4: Subject-To for Quick Flip

You take a property subject-to, make cosmetic improvements, and resell it within 3–6 months. The existing mortgage gets paid off at the sale closing.

Best for: Deals where the property needs light work and the margin is good enough to cover short-term carrying costs.

Ethical Considerations

Subject-to investing has vocal critics. Common objections:

"You're taking advantage of distressed sellers." In many cases, the alternative for these sellers is foreclosure—which destroys their credit for 7 years and may result in a deficiency judgment. A subject-to deal stops foreclosure, keeps their credit intact (as long as you make payments), and provides relief. That said, you have an ethical obligation to ensure the seller fully understands the arrangement, including the risks.

"The seller is still liable for the mortgage." True. If you default on payments, the seller's credit is destroyed and they could face a deficiency judgment. This is why ethical subject-to investors:

• Always use written agreements reviewed by attorneys
• Provide sellers with full disclosure documents
• Have genuine ability and intent to make the payments
• Carry adequate insurance

"You're violating the mortgage terms." The due-on-sale clause is a contractual provision, not a law. Selling subject-to isn't illegal—it's a breach of contract that gives the lender the option to accelerate the loan. There's a meaningful difference between illegal activity and contractual risk.

Tax Implications

For the Buyer

• Depreciation: You can depreciate the property since you're the owner of record
• Interest deduction: The interest portion of payments is generally deductible against rental income, even though the loan is in the seller's name
• Consult a CPA on your specific situation, as IRS treatment can vary

For the Seller

• The seller may still receive mortgage interest statements (Form 1098) in their name
• The installment sale rules may apply if the seller receives payments over time
• The seller should work with a tax professional to properly report the transaction
• Capital gains implications depend on the sale price relative to the seller's basis

Frequently Asked Questions

Is subject-to financing legal?

Yes. Buying property subject to an existing mortgage is legal in all 50 states. It is not illegal to transfer property while a mortgage exists. However, it may trigger the due-on-sale clause in the mortgage contract, which gives the lender the right (not obligation) to demand full repayment.

What happens to the seller's credit?

As long as you make the mortgage payments on time, the seller's credit is unaffected—in fact, it may improve as the loan balance decreases. If you miss payments, the seller's credit is damaged since the loan is in their name.

Can I do subject-to with an FHA or VA loan?

Technically yes, but FHA and VA loans carry additional risks. FHA loans have specific occupancy requirements (the borrower is supposed to live in the property). VA loans have entitlement issues—the seller's VA entitlement remains tied to the loan until it's paid off, limiting their ability to use VA financing for another home. Conventional loans are generally cleaner for subject-to deals.

How do I make payments on someone else's mortgage?

You can mail checks, set up online bill pay through your bank to the servicer's address, or use the servicer's online portal (you'll need the loan number and seller's authorization). Some investors use a third-party loan servicer to handle payments for documentation and accountability.

What if the seller files for bankruptcy?

This is a real risk. If the seller files bankruptcy, the property (which is still connected to their mortgage) could be pulled into the bankruptcy estate. Protect yourself with proper documentation, title insurance, and legal counsel. Some investors include bankruptcy-related provisions in their purchase agreements.

How do I find out a property's mortgage details?

County recorder's office records show the original mortgage amount, lender, and recording date. You won't find the current balance or interest rate in public records—you need the seller to provide current mortgage statements or authorize you to contact the servicer.

The Bottom Line

Subject-to financing lets you acquire properties with existing financing that may be far better than anything available in today's market. A 3.5% mortgage originated in 2021 is worth preserving—it's an asset in itself.

But subject-to deals require careful execution. You need motivated sellers, thorough due diligence, proper legal documentation, and an honest conversation about the risks—both the due-on-sale clause and the seller's ongoing liability.

Done ethically and professionally, subject-to is a legitimate strategy that helps distressed sellers avoid foreclosure while giving investors access to properties with favorable financing terms. Done sloppily, it creates problems for everyone.

Get educated, get an attorney, and get the documentation right. The details matter enormously in subject-to transactions.

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