Subject-To (SubTo) explained
SubTo means the buyer takes over the seller's existing mortgage payments without formally assuming the loan. It's the most powerful tool in creative finance when the seller has a low interest rate and high equity isn't on the table.
How it works
Title transfers to the buyer. The mortgage stays in the seller's name. The buyer makes the monthly payments going forward. The seller walks away from their housing payment without selling for cash they don't need.
When SubTo is the right play
SubTo lights up when the seller has a sub-6% interest rate (anything from the 2020-2021 era), modest equity, and no urgent need for a lump sum. Today's rates make their loan more valuable than the equity could ever be in cash.
- Existing mortgage rate below 6%
- Seller wants out of the house but doesn't need cash
- Behind on payments or facing payment stress
- Equity position too thin for cash to make sense
Entry fee structure
Most SubTo deals have an entry fee — money paid to the seller at closing to make the deal worth their while. Rinsed targets entry fees under 5% of ARV. Higher than that and you're effectively buying equity instead of taking over a payment.
Why it has to be free and clear of HOA gotchas
HOAs can foreclose on the property if dues lapse, even if the mortgage is current. Always verify HOA status. SubTo deals with messy HOA situations should be passed unless you can negotiate them clean.
Risks to know
The due-on-sale clause is the elephant in the room. The lender can technically call the loan. In practice this rarely happens — banks just want their money, and the loan keeps performing. But you need a plan if it does (refinance, sell, or pay off).