How to Fund a Subject-To Deal: Earnest Money, Arrears and Closing Costs

Subject-to gets pitched as buying with no money down. The existing loan does the heavy lifting, but the closing table still asks for cash. Here is what you will need to fund and where it can come from.

What is a subject-to deal?

In a subject-to (subto) deal, you take title to a property subject to the seller's existing mortgage. The loan stays in the seller's name, and you take over the payments. Pace Morby's REI Pocket Dictionary describes it as taking over someone's mortgage payments, done when the seller has no equity, with the buyer taking on the original loan's payments and interest rate.

What cash does a subject-to deal need?

Distressed sellers are often behind on payments, so arrears can be the biggest number on the list. Get a written payoff or reinstatement figure from the servicer before you commit.

Where does the money come from?

1. Your own cash. Simple, but it ties up money you may need for repairs and reserves.
2. A partner. A JV partner funds the cash needs for a share of the deal.
3. A gator or private lender. Pace Morby's dictionary describes a related strategy, the sub-tail, as buying subject-to with a private money lender paying for things like missed mortgage payments, repairs and closing costs so the wholesaler is zero dollars out of pocket.
4. EMD funding for the deposit. Axelrad's EMD funding covers a fully refundable earnest money deposit, including on land. The fee can be flat or a percentage of the deal, typically a percentage, with a $500 minimum, paid up front and shown before you sign.
5. Short-term gap money for the rest. Axelrad's cash advance and gap loans are built for quick capital to close, with rates starting at 2.5%. Gap funding can be repaid several ways, typically after closing through a seller carry. Whether a specific subject-to file fits depends on the deal, so send it and ask.

How do you fund a subject-to deal, step by step?

1. Get the numbers in writing. Loan balance, monthly payment, arrears and reinstatement figure from the servicer, with the seller's authorization.
2. Sign the purchase agreement. Note the deposit amount, deadlines and any contingencies.
3. Fund the deposit. Wire the EMD to the title or escrow company.
4. Line up the closing cash. Total the arrears, closing costs and any cash to seller, and confirm the source and repayment plan for each.
5. Close through title. Title handles the transfer, the reinstatement payment and the disbursements.
6. Set up payments and insurance. Make sure the existing loan's payments continue on time and the property is properly insured.
7. Execute your exit. Rent, resell or refinance on the timeline you planned, and repay any short-term funding as agreed.

What are the risks of a subject-to deal?

• Due-on-sale. Many mortgages let the lender call the loan due if the property is transferred without its consent. Federal law (12 U.S.C. 1701j-3) generally allows lenders to enforce due-on-sale clauses, with listed exceptions. A transfer is not lender consent.
• The seller's credit. The loan stays in the seller's name. Missed payments hurt the seller and can undo the deal.
• Short-term money with no exit. Gap funding is short by design. If your exit is a refinance or resale, make sure the timeline is realistic before you borrow.
• Paperwork. Subject-to transfers involve deeds, authorizations and disclosures that vary by state.

Rules on subject-to transfers and creative finance vary by state, and title companies have their own policies on these closings. This is general information, not legal advice. Have a real estate attorney in the property's state review the deal.

How is this different from the Morby method?

Subject-to keeps the seller's existing loan in place. The Morby method adds a new purchase loan and a seller-carried down payment. The cash needs overlap, though: both need a deposit and cash at closing. See the Morby method explained and Morby method, subject-to and gator funding: differences.

Key takeaways

• Subject-to deals still need cash: earnest money, arrears, closing costs and sometimes cash to the seller.
• Get the arrears and reinstatement figure in writing before you commit.
• EMD funding can cover a refundable deposit; short-term gap money can help with cash to close.
• Axelrad's EMD funding has a $500 minimum fee; gap loans start at 2.5%. Every file is reviewed on its own.
• Due-on-sale and state rules matter. Have a real estate attorney review the deal.

Talk to Axelrad

Have a subject-to deal with a deposit or cash-to-close need? Send it through Axelrad's application, and see gap funding and EMD funding for current terms.