As real estate investors, when we, Proxima Investors, buy a property “Subject To Existing Financing” (often shortened to Subject To, or Sub To) means that we, as buyers, take over the responsibility for the seller’s existing mortgage payments instead of getting our own loan, avoiding the burden of the long and uncertain process and making waiving the financing contingency possible.

So it’s a simple sale in which, typically, the existing mortgage stays in place and it keeps getting paid down and eventually in full, following the payment schedule of the borrower who is selling.

Here’s a breakdown:

• The seller doesn’t pay off their mortgage loan: The seller doesn’t go through the process of closing out their current mortgage loan, avoiding the costs and paperwork, but very importantly, the time and hassle required for the process.
• Proxima Investors assume the payments: As buyers, we agree to make the mortgage payments on the existing loan in a legally enforceable contract that reflects and respects the terms of the mortgage loan agreement.
• The existing loan balance becomes part of the purchase price: The unpaid balance of the seller’s mortgage is essentially added to the purchase price you negotiate for the Seller’s equity position.

Advantages of Subject-to Existing Financing for Buyers:

• Lower upfront costs: We may not need a down payment or many closing costs since you’re not getting a new mortgage.
• Faster closing: This approach can bypass the traditional, burdensome, slow, and uncertain loan approval process, which is very expensive anyway, leading to a quicker and more convenient sale.
• Potentially lower payments: If the seller’s existing interest rate is lower than current rates, we could get a good deal that allows us to also resell more easily and quickly as a bonus for all parties.
• Easier qualification: This option can be attractive for investors who can avoid the need, in full or in part, for an expensive and complicated investment loan with all its negatives.
• Sanctioned by the Housing and Urban Development Federal Agency (HUD): Presented as an option on lines 203 & 503 of the Federal HUD-1 Settlement Statement, it is legal in all states.

Disadvantages of Subject-to Existing Financing for Buyers:

• Limited control: We can’t easily modify the terms of the existing loan (interest rate, payment schedule).
• Limited financing options: We can’t leverage features like down payment assistance programs offered with traditional mortgages.
• Potential for hidden issues: The existing loan may have prepayment penalties or other restrictions that we must be aware of through disclosures, review and research (our due diligence).
• Sophisticated, niche method of purchase: Although very popular in the early 1980s and during other periods of high mortgage rates, it became less used with the lowering of the rates, but it’s coming back in this tight credit environment. As an option new to many home sellers, they must put some thought into understanding all the details and features of this type of deal to determine if it’s a viable option, based on the goals, needs, and expectations of the sale.

Overall Considerations:

• Market interest rates: Subject-to might not be ideal if current rates are lower than the seller’s existing loan. Reduced costs and paperwork may still make the difference in favor of this method.
• Property condition: Any necessary repairs and potential costs have to be factored in, before buying subject-to.
• Legal and Tax implications: We should all consult with professionals to understand the legal and tax ramifications of this type of purchase, as always. Finding the right professional with specific experience is absolutely critical.

Proxima Investors have completed many of these transactions and they are often one of the simplest ways to purchase and sell homes and real estate in general, although every situation is different and another type of transaction may better suit a specific situation.