What is a “Subject To” Purchase
“Subject To” is when you purchase property subject to existing financing already in place, along with any other liens or encumbrances already attached. You do not formally assume the loan through the bank. The owner deeds the property to you, and you take over making the payments to the lending institution.
What about the “due on sale” clause?
The most common question asked by the sellers is: “What about the ‘due on sale’ clause?” This one concern often times keeps numerous investors from purchasing properties using the “subject to” method. Let’s address this right now.
The “due on sale” clause states that the lender has the right to call the entire note due if any of the terms of the initial agreement are not met, such as payments being paid or transfer of the deed without paying off the original loan.
Please understand that the job of a lender is to collect payments. They loan out money at a higher interest rate then they are paying and create their cash flow from the difference on that spread. If a loan were at 8% or 9%, why would a lender call that loan due to have it financed at a lower interest rate? They would be cutting their own profit.
Now, if the payments were not being made, and it was a non-performing loan, they have the right to foreclose in order to recapture their property, so they can sell it again.
Everyone is so worried about what will happen to the buyer or seller of that home if a loan is called due. Let’s look at the other end of it. What would happen to the lender if they called that loan due?
Here’s what happens to the lending institutions if they take back a property. When a lender has taken back a property either by foreclosing or calling a note due, they are “punished” by the Federal government for having that non-performing loan. I am sure you have heard the expression “bad debt”?
If a loan that was taken through a lender is a non-performing loan (meaning the loan is on the “books” of that lender, and payments are not being collected on that loan), then it is considered a bad debt. When this happens the government will not allow eight times that amount to be loaned out by the institution that is holding that bad debt.
In other words, if a bank has $100,000 in bad debts, that means they cannot loan out the amount of $800,000 because the government is punishing them for having that non-performing loan on their “books.”