What is Subject To Financing When Purchasing Real Estate

TLDR (too long didn’t read):

You transfer title on the house to Tony Buys Homes. We would take over the existing payments on the house and pay the lender directly. For you, you get a good price, save on capital gains, save on realtor fees, save on closing costs, no inspections, no appraisals etc. You are protected in the case of defaults. We use a servicing company that will notify you each month payments are made. As payments are made this helps your DTI ratio and can apply for a new loan. Learn more below!

Sub-To Financing Explained

This innovative investment strategy has gained traction for its ability to expedite property acquisitions while reducing initial expenses. Here’s a detailed guide for those interested in exploring Subto investing:

What is SubTo real estate investing?

SubTo (Subject-to) real estate investing is a technique where the buyer assumes the seller’s existing mortgage. This method allows you to acquire property under its existing financing terms, circumventing the traditional banking process. This approach can enable investors to obtain properties with minimal or no down payment, appealing to both novices and seasoned professionals.

Benefits of SubTo investing

  • Reduced upfront costs: One of the primary benefits of SubTo investing is acquiring properties without the need for a large down payment or substantial closing costs associated with standard financing methods.
  • Quicker acquisition: By taking over the existing mortgage, you can avoid the lengthy process associated with new loan approvals, thereby acquiring properties faster.
  • Minimal impact on credit score: SubTo allows investors to add to their portfolios without the transactions appearing as new mortgages on their credit reports, thus not affecting their credit score.

How does subject to financing benefit the seller?

Many sellers who are ideal candidates for a Subject To transaction are motivated to sell due to unique circumstances but find traditional selling methods unfeasible. This could be due to urgent financial troubles, lack of equity, the poor condition of the property, or other financial constraints.

Here are several advantages for sellers who enter into a Subject To sale agreement:

Quick Sale:

One of the most significant benefits for the seller is the speed of the transaction. Since the buyer does not need to secure new financing and no repairs are required by the seller, the property can be sold much faster. This quick sale can swiftly alleviate the seller’s immediate financial burdens. Unlike the typical weeks-long closing process, a Subject To transaction can close in just a few days.

Current Payments and Improved Credit:

For sellers facing foreclosure due to delinquent payments, a Subject To agreement can be particularly beneficial. The buyer’s assumption of the mortgage payments can bring the seller current on their loan, potentially preserving and even improving their credit score as payments are made consistently.

Solution for Unsellable Homes:

Sellers with no home equity and overdue payments often cannot sell their homes through traditional methods or afford to settle their loans. If the seller has little to no equity, they might also be required to pay some closing costs in a conventional sale—expenses they may be unable to cover. Additionally, if the home requires significant repairs to meet market standards, the seller might not have the funds for renovations. In such cases, your proposal to assume their mortgage payments can offer a much-needed solution when no other viable options are available.

How does subject to financing benefit the Buyer?

  • Save time with a quick close
  • Avoid a credit check
  • Save money on lender fees and real estate commissions
  • Potentially better interest rate than current rates

Potential risks

  • Legal compliance: While SubTo investing is lawful, it’s imperative to adhere to all local laws and regulations. Collaborate with legal experts who specialize in SubTo transactions to prevent any legal issues.
  • Risk of previous owner’s default: The responsibility for the mortgage still lies with the original borrower. Regular communication with the seller and prompt attention to any arising issues are crucial to manage this risk effectively.

Does Subject To affect the sellers DTI? (Debt to income ratio)

Payments of existing loan being paid off can be used for a loan officer to acquire a new loan. DTI (debt to income ratio) will be 100% removed after 3 years of me the buyer making the payments. Down the road, when the seller speaks to a loan officer the provided documentation of payment will be more than enough to secure a new loan.

Can Selling my House Subject to save me Capital Gains taxes?

Typically, when real estate is sold using traditional financing, the seller pays tax on the full gain at the time of sale. However, if the seller finances the sale themselves—meaning the buyer makes mortgage payments directly to the seller rather than to a bank—part of the capital gain can be deferred.

In cases where the transaction is structured as an installment sale, the seller defers receiving some of the payment until future years. Similarly, under Internal Revenue Code (IRC) Section 453, most, if not all, of the capital gain from the sale is also deferred, allowing the seller to spread out the tax liability over the period payments are received.

How much is capital gains tax when you sell real estate?

If you sell a house or property within a year of purchasing it, the profit is considered short-term capital gains and is taxed at the same rate as your ordinary income, which can be up to 37 percent. If you own the property for more than a year before selling, the profit is treated as long-term capital gains, with tax rates of 0 percent, 15 percent, or 20 percent, depending on your income tax bracket.

How does capital gains tax work when selling real estate work?

Capital gains tax is a key consideration when selling real estate, as it impacts the amount of tax you owe on the profit made from the sale of a property. Here’s how capital gains on real estate sales generally work:

Definition of Capital Gains: Capital gains are the profits earned from the sale of an asset, like real estate, which are calculated by subtracting the purchase price (and any improvements) from the selling price of the property. The result is the gain or profit made on the transaction.

Short-Term vs. Long-Term Gains:

Short-term capital gains are profits from the sale of a property that was owned for one year or less. These gains are taxed as ordinary income, which means they could be subject to higher tax rates.
Long-term capital gains are profits from the sale of property held for more than one year. These gains benefit from lower tax rates, which are typically 0%, 15%, or 20%, depending on your overall taxable income.
Primary Residence Exclusion: If you are selling your primary residence, you may qualify for an exclusion from capital gains tax on some of the profit. In the U.S., for example, you can exclude up to $250,000 of capital gains if you’re single, or $500,000 if you’re married and filing jointly, provided you’ve lived in the home for at least two of the five years immediately preceding the sale.

Calculating Capital Gains: To calculate your capital gains, subtract the purchase price of the property (the “basis”) plus any improvements you made, from the selling price. From this gross gain, you can subtract costs associated with selling the property, such as real estate agent commissions and legal fees, to find your net gain.

Reporting Capital Gains: Capital gains must be reported on your tax returns, and specific forms are used depending on the type of asset sold. In the U.S., for instance, you would typically use Schedule D and Form 8949 to report real estate capital gains.

Exceptions and Special Rules: There are various exceptions and special rules for specific types of real estate or situations, such as investment properties, rental properties, and properties that have been converted from personal use to business use or vice versa.

It’s important to maintain good records of the purchase price, improvements made, and costs associated with selling your property to accurately calculate and report capital gains. Consulting with a tax professional can also help navigate the complexities of capital gains tax, ensuring you meet all legal requirements and take advantage of any available tax benefits.