‘Subject-To’ Mortgage Investing: Buying Homes in the Post-COVID Market

“Subject-To” mortgages are going to be a defining feature of the post-COVID real estate market, and here’s why…

As of April, roughly 2.5 million homes are in forbearance, according to the Mortgage Bankers Association. That means that they’ve entered an agreement with their lender to delay foreclosure.

Due to restrictions set up during COVID to limit the spread of the virus, lenders couldn’t officially evict homeowners who weren’t paying down their mortgages. With those restrictions being lifted, lenders are going to start to foreclose on the homes that are in forbearance.

That means many people are looking to get out from underneath their mortgages, and that means that the housing market might experience a boom in the supply of certain properties.

For the savvy investor, this is the opportunity of a lifetime.

subject to mortgage: give me your mortgage

Give me your mortgage ...

What is a ‘Subject-To?’ How Will It Affect the Market?

"Subject-To" is a way of purchasing real estate where the real estate investor takes title to the property but the existing loan stays in the name of the seller. In other words, their interest is “subject to” the existing financing. The investor now controls the property and makes the mortgage payments on the seller's existing mortgage.

If, for example, the seller locked in a $200k mortgage at a 3.8% interest rate, instead of getting another lender to come up with a new loan (and therefore racking up a bunch of costs associated with that process, including inspection, appraisal, broker fees, etc), the investor just pays the ~$1150 mortgage and the home is theirs.

So here's the Cliff Notes version:

  • “Subject-To” lets investors purchase properties without having to qualify for a new loan. They simply take on the seller’s existing loan, making payments in their place.
  • The seller gets out from underneath their loan and the investor gets to purchase a home with nowhere near the same level of requirements as they would if they wanted a new mortgage.

How Do You Find ‘Subject-To’s?’ Why Do You Want Them?

What makes subject-to mortgage investing so great? There are a few reasons…

#1 You Never Have to Qualify

"Subject-To" is a great way to build a portfolio. The loans are not in your name and you never have to qualify. The seller already qualified for the loan; all you’re doing is making their payments and putting your name on the title.

In order to qualify for a conventional loan, you have to provide proof of income, a solid credit score, a low debt-to-income ratio, and more. However, when you’re buying properties “subject-to,” those same requirements don’t exist. This makes it that much easier to rack up a bunch of rental properties.

subject to mortgage: cat reading book#2 Lower Fees

Fees can completely ruin a real estate transaction. A 3% broker fee every time you buy and sell real estate can kill many deals—even if there are potentially tens of thousands of dollars to be made. If it all ends up going into the realtor’s pocket (and their brokerage’s pockets), then what’s the point?

When you take over an existing mortgage, though, you don’t have to worry about brokerage fees, along with many others. You can become exposed to the real estate market in a low-cost way, completely changing the dynamics of the deal.

Even if the seller has a backlog of three months of missed mortgage payments, it’s a drop in the bucket compared to the costs that are typically associated with buying a home in the first place. 

#3 Easier to Rack Up a Portfolio with Little Money Down

This ties in with both of the points that we made above, but it’s a big one: when you don’t have to qualify (and re-qualify) for mortgages and you can avoid closing costs (along with many other fees), it becomes much easier to rack up a decently sized portfolio with less money.

Furthermore, many people who qualified for these mortgages simply suffered some form of financial hardship at the worst possible time: a once-in-a-century global pandemic. The loans don’t always have poor interest rates and the sellers were sometimes able to put down a sizable amount of cash for the down payment.

So, there are good mortgages out there just waiting for someone else to take them over. And, finally, that brings us to our last point:

#4 Unprecedented Opportunity

During the 2008 meltdown, roughly twice as many homes were in forbearance, so why is the COVID-19 pandemic any different? How could it possibly be an “unprecedented” (admittedly an overused word these past couple of years) opportunity? 

Unlike today, in 2008, many average investors didn’t know that a possible crash was looming. With the pandemic being such a global and ever-present phenomenon over the past year and a half, we have hard data on exactly how many people aren’t paying down their loans and we have a rough idea of when the restrictions might be lifted.

In this case, though, there’s time to prepare for the surge of these types of properties. Sure, they’ll be in demand—but there will also be an incredible supply.

subject to mortgage: owl faceConclusion: ‘Subject-To’ Mortgage Investing: Buying Homes in the Post-COVID Market

A record number of homes are in forbearance. According to the Mortgage Bankers Association, it’s about 2.5 million. With COVID restrictions being lifted across the US, lenders are going to start cracking down on those mortgages, which means many people will be looking for a way out.

Savvy real estate investors can offer them a way out: through “subject-to” mortgage investing. The investor will add his name to the title and make mortgage payments in place of the seller. It can be a great way for the investor to make a low-fee deal and for the seller to get out from underneath a mortgage that he or she can no longer afford.

Last Updated: 
July 12, 2021

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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