Subject-To Real Estate Closings

Subject-to (Sub-2) in real estate is a creative financing strategy where a buyer takes ownership of a property but leaves the existing mortgage in the seller’s name. That is, the property is purchased “subject to” the original mortgage.  The buyer receives the deed and agrees to continue making the mortgage payments, while the loan itself remains in the seller’s name. 

- The seller gets the benefit of saving their credit from default or foreclosure, and the monthly payments improve their credit score. Sometimes a seller will even receive a small amount of money to, for example, help them move to a new home.

- The buyer gets to acquire property without applying for a new loan, with no down payment, and interest rates locked in by the seller instead of higher investor rates.

Imagine a homeowner named Sarah

Sarah bought her house years ago. She has a mortgage with a low interest rate, but recently she lost her job and is struggling to keep up with payments. The house needs some work done, but she does not have the cash to make the repairs, and she won’t be able to sell the house on the regular market without these repairs. Default is looming and she wants a way out without damaging her credit.

Enter Bill, a local Alabama real estate investor. Bill approaches Sarah with a proposal; he will buy her house “subject to” the existing mortgage. This means Sarah will transfer the deed to Bill, giving him ownership of the property, and the mortgage will remain in Sarah’s name. Bill agrees to take over the monthly payments directly, keeping the loan current. For Sarah, this provides immediate relief—she no longer has to worry about the property or the payments. For Bill, it’s an opportunity to acquire a home without applying for a new loan, and he benefits from the low interest rate Sarah secured years ago.

The deal begins with negotiation. Sarah and Bill agree on terms, including how Bill will handle payments and what protections Sarah will have. They sign a contract that outlines responsibilities and they engage a closing agent such as www.Alabama-Closings.com and the closing agent answers any questions either side has: The closing agent doesn’t represent either party over the other, they are there to help. At closing, Bill becomes the legal owner of the house, while Sarah’s mortgage remains in place. From that point forward, Bill makes the payments, makes repairs, manages the property, and may even rent it out.

Of course, there are risks

Most mortgages include a “due-on-sale” clause, which gives the lender the right but not the obligation to demand full repayment if ownership changes. While lenders often don’t enforce this, it’s a possibility Bill must be prepared for. Sarah also remains legally tied to the loan—if Bill fails to pay, her credit could suffer.

In the end, Sarah avoids foreclosure and moves on with her life, while Bill gains a property with favorable financing terms. This subject-to deal demonstrates how creative financing can solve problems for both sellers and buyers, but it also highlights the importance of trust, legal safeguards, and awareness of potential lender action.

No representation is made that legal services to be provided are greater than legal services of other Alabama lawyers.

Attorney Greg Stanley

Closings@Stanley-Law.Com