Subject To/Creative Financing Offers
A Subject-To/Wrap Offer is a type of creative real estate financing where a buyer purchases a property that already has an existing mortgage, rather than getting a new loan in their own name. It’s often used when traditional financing isn’t ideal or when a seller wants to move quickly without paying off their current loan. In these deals, ownership transfers to the buyer, but the original loan stays in place under the seller’s name.
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Subject-To (Common): The buyer assumes responsibility for making payments on the seller’s existing mortgage, often by using the mortgage servicer’s login information to submit payments directly. In this setup, the buyer is making payments on a loan that technically remains in the seller’s name, which typically goes against the lender’s terms. While the seller’s loan stays active in the Sellers name, the buyer now holds title to the property.
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Wraparound (Not Common): The seller creates a new “wrapped” loan for the buyer that includes their existing mortgage. The buyer pays the seller directly, and the seller continues to pay their original mortgage—often keeping the difference as profit.
Why would this be a terrible thing for a Seller to do? Well many reasons..
1) the mortgage remains entirely in the Seller’s name, meaning they’re still legally and financially responsible for the loan, even though someone else now controls the property and is making the payments. If the Buyer stops paying, the Seller’s credit can be ruined, and they could face foreclosure on a home they no longer technically own.
2) most mortgages have a “due-on-sale” clause, which allows the lender to demand full repayment of the loan if ownership changes hands without approval. This could put the Seller in immediate default.
3) The Seller loses control and protection, since the Buyer now holds title and can potentially rent, damage, or even resell the property without the Seller’s consent. In short, it’s high-risk for Sellers that should never be done.
How are these scenarios different the a Buyer assuming a Sellers current mortgage?
In a loan assumption, the Buyer formally takes over the existing mortgage through the lender’s assumption process, meaning the lender reviews and qualifies the Buyer just like a new loan. Once approved, the Seller is typically released from liability, and the loan is legally transferred into the Buyer’s name.
By contrast, Subject-To or Wrap deals often happen without lender approval, leaving the loan in the Seller’s name while someone else makes payments. That lack of transparency is what triggers risk, which includes, violating lender terms, keeping the Seller liable, and potentially activating the “due-on-sale” clause.
In short, assuming a loan is legitimate and protected, a Subject-To or Wraparound is not.