Subject-To vs Seller Financing: What's the Difference?

How does a subject-to purchase work?

"Subject-to" is short for buying a property subject to the existing financing. The deed transfers to you. The seller's loan is not paid off and not formally assumed. It stays in the seller's name, and you take over the monthly payments.

Investors like it because the existing loan may carry a rate or balance that would be hard to replace. The trade-off is that the seller's lender never agreed to you. Most mortgages contain a due-on-sale clause, which federal law defines as a provision letting the lender declare the balance due if the property is transferred without its consent (12 U.S.C. 1701j-3, Cornell LII). Whether a lender acts on it is its choice, which is exactly the risk.

How does seller financing work?

With seller financing (also called owner financing or a seller carry), the seller agrees to take payments over time instead of cash at closing. You sign a promissory note to the seller, usually secured by a mortgage or deed of trust on the property. The seller may own the property free and clear, or the seller financing may sit behind an existing loan as a second lien.

The terms are whatever the two of you negotiate: price, down payment, rate, payment schedule and balloon date. That flexibility is the appeal.

Subject-to vs seller financing at a glance

What cash do you still need at closing?

Neither structure is free money. A subject-to deal often needs cash for missed payments (arrears), closing costs and whatever the seller wants in hand. Seller financing usually needs a down payment the seller is willing to accept, plus closing costs.

That cash-to-close gap is where gap funding comes in. Axelrad's gap and cash advance program starts at 2.5%, and gap funding is typically repaid after closing through a seller carry, among other ways. The creative finance division describes this as funding "whatever is missing": the deposit, the shortfall or the middle of a double close.

Can you combine subject-to and seller financing?

Yes, and it is common. A frequent structure takes the property subject to the existing first mortgage, then has the seller carry a second note for part of their equity. The investor brings enough cash to cover arrears, closing costs and the seller's cash-in-hand. People in creative-finance circles sometimes call this a "stack" or attach a teacher's name to it. Labels vary; the structure is what matters.

A worked example

Example only, with round hypothetical numbers. A seller owes $180,000 on an existing mortgage and agrees to sell for $230,000.

• Subject-to only: You take title subject to the $180,000 loan and need $50,000 for the seller's equity, plus closing costs.
• Seller financing only (free-and-clear property): If the seller owned it outright, they might carry $200,000 and take $30,000 down.
• Combined: You take the $180,000 loan subject-to. The seller carries $40,000 as a second note. You bring $10,000 to the seller plus closing costs and any arrears.

The combined version shrinks the cash at closing the most. It also means two payments, two sets of terms and two parties who can be unhappy if something goes wrong.

Which one should you use?

Ask three questions. Does the property have an existing loan worth keeping? Will the seller accept payments rather than cash? And can the deal carry the monthly payments and still exit on time? Have a real estate attorney draft or review the documents in your state, because disclosure rules, forms and practices differ, and title companies have their own policies on creative closings.

Key takeaways

• Subject-to keeps the seller's existing lender; seller financing makes the seller the lender.
• Subject-to carries due-on-sale risk because the lender never consented to the transfer.
• Seller financing carries balloon and refinance risk on the terms you negotiate.
• Both usually need cash at closing; gap funding can cover that gap.
• Combining the two often minimizes cash to close but adds complexity.

Need cash to close a creative deal?

If you have a subject-to or seller-financed contract and a gap at the closing table, send the deal to Axelrad and the team will look at how the gap gets repaid. Details on the program are on the gap funding page.