Subject To Financing

How Subject To Financing Actually Works in Practice

In a subject to financing deal, the core idea is simple: the buyer gets the deed, and the seller keeps the loan in their name. The buyer makes payments on that existing loan instead of taking out a brand new mortgage.

Here is how a typical subject to transaction flows from start to finish:

• Purchase agreement spells out "subject to" terms. The contract clearly states that the buyer is purchasing the property subject to the existing mortgage, including the lender, current balance, interest rate, and payment amount.
• The buyer evaluates the existing loan. The interest rate, remaining term, and payment history matter more than usual, because the buyer is stepping into that exact loan structure.
• Title transfers, but the loan stays in place. At closing, the title is recorded in the buyer's name, while the seller's mortgage remains unchanged with the lender. From the lender's perspective, the original borrower is still responsible.
• Buyer starts making the payments. The buyer either pays the lender directly or pays the seller, who then pays the lender. The specific arrangement must be documented in writing to avoid disputes.
• Additional financing may fill the gap. If the property's price is higher than the remaining loan balance, the buyer may pay the difference in cash, through a second loan, or through a separate promissory note to the seller.

It is important to distinguish subject to financing from a traditional mortgage assumption. In a formal assumption, the lender approves the buyer, and the buyer becomes legally responsible on the note. In a subject to deal, the seller remains on the hook with the lender, even though the buyer controls the property and pays the mortgage.

Benefits, Risks, and When Subject To Financing Makes Sense

Subject to financing can be a powerful tool when used thoughtfully. It can create access to favorable mortgage terms, help a seller move a property that might be difficult to sell conventionally, and reduce closing friction. At the same time, it introduces unique risks that both parties need to understand.

Potential benefits for buyers

• Access to better loan terms. Buyers may step into a lower interest rate or more favorable amortization schedule than what current lenders are offering.
• Lower upfront costs. Closing costs can be lower than arranging a new mortgage, and buyers may avoid some conventional lending requirements.
• Speed and flexibility. Because the existing loan stays in place, the transaction can sometimes close faster than a standard financed purchase.

Potential benefits for sellers

• Ability to move a property that is hard to sell. Offering subject to terms can attract buyers in a slow or high-rate market.
• Relief from monthly payments. Even though the loan stays in the seller's name, having a buyer step in and make the payments can ease cash flow pressure.
• Possibility of higher price. Buyers may be willing to pay more overall in exchange for access to an existing low-rate loan.

Key risks and points of caution

• Due-on-sale clause risk. Many mortgages include a due-on-sale clause that allows the lender to call the loan due if the property is transferred. Buyers and sellers need to understand what their loan documents say and how that risk will be handled.
• Seller still carries legal liability. If the buyer stops paying, the lender pursues the seller, not the buyer, because the seller is still the borrower on record.
• Credit and relationship risk. Late or missed payments by the buyer can damage the seller's credit and create serious conflict if the parties did not set up clear protections.
• Limited control with the lender. Because the lender did not underwrite the buyer directly, there is no guarantee the lender will cooperate if problems arise.

Subject to financing tends to make the most sense when the existing mortgage carries an attractive rate, the loan is in good standing, and both parties are motivated to structure a deal that would be difficult or expensive using traditional financing.

Practical Checklist for Buyers and Sellers Considering Subject To Deals

Before entering into a subject to financing arrangement, both sides should walk through a simple but disciplined checklist. This helps surface risks early and keeps expectations aligned.

For buyers

• Review the existing loan documents. Confirm the interest rate, remaining term, payment amount, maturity date, and whether a due-on-sale clause exists.
• Verify payment history. Ask for a recent mortgage statement and, if possible, a payment history to confirm that the loan is current.
• Confirm total cash requirements. Add up the seller's equity, closing costs, reserves, and any repairs so you know your total out-of-pocket amount.
• Clarify how payments will be made. Decide whether you will pay the lender directly or pay the seller, and put that arrangement in writing.
• Understand your exit plan. Think through how long you expect to hold the property and how you might refinance or sell in the future.

For sellers

• Assess your risk tolerance. Recognize that your name stays on the loan and that your credit is exposed if the buyer fails to pay.
• Document protections. Consider safeguards such as written default remedies, notice requirements, and clear timelines if payments are missed.
• Confirm the buyer's capacity. Even if the lender is not formally underwriting the buyer, you can ask for proof of income, reserves, and references to gain confidence.
• Track the loan after closing. Arrange a way to monitor that payments remain current, such as online access or monthly statements.

Because subject to financing blends legal, financial, and practical considerations, many buyers and sellers choose to work with experienced professionals who understand these structures and can help draft clear, enforceable documents.