Doing a ‘subject-to’ deal is something that I cover in-depth in our Unlimited Funding Program, and is an important concept to understand if you are using our methods for becoming successful in real estate investing.
What Is A ‘Subject-To’ Deal?
A ‘subject-to’ deal is also what I call the “get the deed” method. Ultimately, you are buying the home ‘subject-to’ the seller’s existing loan. The main benefit of this type of deal is it can be done without using your own credit or getting a bank loan.
When a seller takes out a loan for their home, they are obligated to pay that loan back to the originator. However, sometimes this isn’t possible, and they can be stuck trying to pay for a loan they can no longer afford. That is where you can step in as an investor. In short, you approach the motivated seller and negotiate to take control of the deed and monthly payment. Sometimes you may also offer them a small down payment, but this is not always the case. Sometimes it is enough to give them peace of mind because they know they can no longer afford the house payments. As long as the payments are being made, you will enjoy full ownership of the property without taking out your own loan.
This is just a basic explanation, and there is much more to a ‘subject-to’ deal that I cover in Niche2Wealth and Unlimited Funding Program. However, today, I want to discuss whether or not the loan type the homeowner has matters when doing this type of deal.
Does The Loan Type Matter?
There are many types of loans: FHA (Federal Housing Administration), VA (U.S. Department of Veterans Affairs), Conventional, etc.
A VA loan will not have implications for you, but it can for the seller. The borrower will likely not be able to get another VA loan until the first one is paid off. This is because there is a loan cap, meaning there is a maximum amount that they can borrow from the VA. Theoretically, they could have two loans if they do not surpass that cap, but most likely the cap would not be high enough for two properties.
In this situation, you want to make sure that you inform them, and get in writing, that they understand that they will not be able to get another loan from the VA until we refinance their existing loan. Lender’s change their qualification criteria frequently, so it is best to never promise anyone they can get a new loan and have a disclosure signed that they understand they may not be able to get a new loan. In our course, I teach how I have helped many sellers get a new loan after buying their home “subject-to”.
Fixed Rate vs. Adjustable Rate
Ultimately, the most important factor to look at is the interest rate. In most cases, you want to look for fixed interest rate loans.
If you do end up with an adjustable rate loan, you need to understand the adjustment schedule, the annual cap, and how it’s adjusting. You can learn this by reading the real estate note for that loan and the deed of trust or the mortgage itself.
When you are taking over the loan ‘subject-to’, all that you care about is that the interest rate is acceptable to you.
In summary, a fixed rate is the most attractive type of loan to do a ‘subject-to’ deal, although you can work with adjustable rate loans after you have more experience, and to fully understand how that type of loan works.