Understanding Subject-To Transactions
Subject-to transactions offer an alternative financing method that can be highly attractive in today’s high-interest real estate market. In these deals, a buyer acquires a property while leaving the seller’s existing mortgage in place. The buyer takes legal title but does not formally assume the loan, which remains in the seller’s name. This approach allows buyers who may not qualify for traditional financing to secure homeownership and offers sellers a way to quickly offload property—especially when facing foreclosure or limited buyer demand.
However, subject-to transactions are not without risk. Most mortgage agreements include a due-on-sale clause, which gives the lender the right to demand full repayment if ownership changes without their approval. This clause presents a significant threat to both parties, as the lender could call the loan due and initiate foreclosure proceedings, even if the buyer is making timely payments. While subject-to arrangements are legal, violating the due-on-sale clause creates a vulnerability that must be addressed carefully through sound legal structure and documentation.
Subject-To Wraparound Mortgages
The most common subject-to deal is the wraparound mortgage, often used in higher-rate environments to give buyers access to more favorable loan terms. In a wraparound arrangement, the seller maintains the original mortgage but issues a new loan to the buyer that wraps around the existing debt. The buyer pays the seller directly, and the seller uses those funds to continue making payments on the original mortgage. This structure enables the buyer to purchase the property with little or no new financing, while the seller benefits from interest income on the difference between the original and wrap loan rates.
The mechanics of a wrap are relatively straightforward, but the legal and financial execution is not. Wraparound mortgages require precise documentation, including a new promissory note and deed of trust that reflect the terms of the secondary loan. The seller should provide the buyer with recent mortgage statements, the original promissory note, and the deed of trust to ensure full transparency. Without clear communication and a well-documented agreement, both parties risk misaligned expectations, hidden liabilities, and disputes over who is responsible for payments to the original lender.
Key Legal Risks and Mitigation Strategies
These creative financing methods, while flexible, carry substantial risks that should not be overlooked. For starters, the due-on-sale clause remains a persistent threat. If the lender chooses to enforce it, the buyer could lose the property despite being current on payments. In addition, if the buyer defaults on payments in a subject-to deal, the seller’s credit is directly affected, as the mortgage remains under their name. Conversely, if the seller experiences financial distress or files for bankruptcy, the original mortgage could be impacted—even if the buyer has fulfilled their obligations.
Wraparound mortgages compound the risk. Because the original mortgage still takes legal priority, a buyer’s interest in the property is subordinate. If the seller fails to forward the buyer’s payments to the lender, the lender can foreclose, leaving the buyer at risk of losing the property despite having honored their side of the agreement. Proper insurance coverage is also critical. A misstep in how the insurance is titled can void claims or trigger a lender’s due-on-sale clause. Where possible, buyers often negotiate to pay the lender directly, reducing the risk of seller default. In some cases, a limited power of attorney is used to allow the buyer to interact with the mortgage servicer or insurance company, adding another layer of protection.
To mitigate these risks, both parties must engage in thorough due diligence. Sellers should confirm the buyer’s financial strength and ability to maintain payments, while buyers must verify that the property title is clean and free of liens. Each agreement should be memorialized through detailed legal documents that define terms, outline default procedures, and establish a clear path for resolution if problems arise.
How GLO Supports Subject-To and Wraparound Transactions
At GLO, we provide comprehensive legal counsel to clients entering into subject-to and wraparound transactions. Our work begins by helping buyers and sellers understand whether this strategy is appropriate for their goals. Once the structure is in place, we prepare and review all necessary legal documents, including wrap promissory notes, deeds of trust, purchase agreement addenda, and amortization schedules. We also ensure that any required power of attorney documents are properly drafted when needed, giving buyers the authority to communicate with mortgage servicers or insurers.
Our role goes beyond paperwork. We help clients assess the financial risks, understand their responsibilities, and establish procedures to protect against default, insurance lapses, and title problems. Whether representing a homeowner looking to offload a property or an investor seeking flexible financing, our goal is to ensure that every transaction is legally compliant, transparent, and tailored to minimize exposure.
Creative financing methods like subject-to deals and wraparound mortgages can unlock unique opportunities in a tight market—but only when they’re executed with legal precision. With GLO’s expertise, clients gain the guidance they need to complete these transactions confidently, knowing that their rights and investments are protected from start to finish.
Contact GLO today to discuss your transaction and ensure your real estate deal is secure, compliant, and tailored to your needs.
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