The typical cost of a new home today is about $326,800. So, if you are in the market for a new home, now may be a great time to consider buying.
Still, many new homeowners don’t consider that along with copious amounts of paperwork, paying a down payment for a home is just the beginning of various closing costs that must be paid to finalize a home sale.
Depending on where you live, there could be dozens of closing costs you will have to pay to satisfy closing the sale. Your closing costs could be commensurate to anywhere between 2% and 5% of the total loan amount.
For your information, $16,340 is 5% of $326,800. Imagine having to pay $16,340 in closing costs just to seal the deal to buy a new home!
The typical cost of a new home today is about $326,800. So, if you are in the market for a new home, now may be a great time to consider buying.
Still, many new homeowners don't consider that along with copious amounts of paperwork, paying a down payment for a home is just the beginning of various closing costs that must be paid to finalize a home sale.
Depending on where you live, there could be dozens of closing costs you will have to pay to satisfy closing the sale. Your closing costs could be commensurate to anywhere between 2% and 5% of the total loan amount.
For your information, $16,340 is 5% of $326,800. Imagine having to pay $16,340 in closing costs just to seal the deal to buy a new home!
Closing costs don’t just show up as one big line item. They include things like appraisal fees, title insurance, attorney charges, recording fees, and prepaid property taxes. For buyers who haven’t gone through the process before, the number of different charges can feel overwhelming. Lenders usually provide a Loan Estimate early in the process, but many people don’t fully review it until they’re sitting at the closing table. Taking the time to understand each fee ahead of time can help you negotiate or shop around for certain services, potentially saving hundreds of dollars.
These hefty closing costs push many buyers toward creative financing options. Some consider seller financing, others look into lease-to-own arrangements, and a growing number explore subject-to transactions. Each option carries different risks and benefits that deserve careful consideration before moving forward.
Related – Buying a Foreclosed House
That is the financial reality new homeowners always deal with when negotiating through a mortgage application to buy a home. It is always said that homeownership is the American dream, but the expense of buying and owning one is never expounded upon enough.
One way to significantly cut down on closing and recurring costs relative to buying a home is to buy a home subject to an existing loan. This basically means that you, as the buyer, unofficially take over the seller's existing mortgage payments.
The mortgage still officially stays in the seller's name, and the mortgage lender stays unaware of the new financial arrangement (or voluntarily looks the other way).
As the buyer, you have no personal or legal liability, relatively speaking, to pay the mortgage since the original lender is not involved. So, it is kind of like taking over a mortgage on the honor system to save money on buying a home.
Think of it this way: you're making the seller's mortgage payment while living in their house, but the bank still sees the seller as the borrower. The deed transfers to you, giving you ownership rights, but the loan obligation remains with the original borrower. This creates a situation where ownership and loan responsibility are split between two parties.
Because of this unusual setup, most subject-to transactions rely heavily on trust and transparency between the buyer and seller. Buyers often perform their own due diligence, checking payment histories and confirming that the mortgage is in good standing before moving forward.
Sellers, on the other hand, need reassurance that their credit won’t be destroyed if the buyer stops making payments. Written agreements, escrow services, or working with an experienced real estate attorney can help establish safeguards that protect both sides of the deal
Image: Two people discussing a home purchase
As previously explained, buying a home subject to an existing loan is an unofficial mortgage arrangement where the buyer takes over the payments but not contractual ownership of the mortgage.
Relative to such an agreement, the existing unpaid balance of the mortgage is re-calculated to become a large portion of the buyer’s bidding price.
Also, you may have to pay for any missed mortgage payments prior to entering the unofficial arrangement.
Understanding the mechanics helps clarify why this strategy appeals to some buyers and sellers. The seller faces financial pressure and needs to sell quickly. You, as the buyer, might lack perfect credit or sufficient down payment funds for conventional financing. You negotiate a purchase price that accounts for the existing loan balance. If the home is worth $300,000 and the seller owes $250,000, you might agree to pay $280,000.
The only serious paperwork you may sign is changing the house’s deed over to your name under this arrangement.
As the buyer, if you decide to cease making mortgage payments, then the house could fall into foreclosure under the seller’s name.
You may decide to sell the house in the future while under a “subject to” arrangement. In such a scenario, you would have to make unofficial arrangements with the original seller. Even then, you wouldn’t be responsible or contractually liable to make any mortgage payments.
Make sure you understand the arrangement you potentially enter into after an agreement. Know the difference between a “subject to” and an “assumable mortgage.”
Related – Joint Mortgage Vs. Joint Ownership: What’s the Difference?
An assumable mortgage is a mortgage that officially transfers ownership from the seller to the buyer. When you assume a mortgage, you are essentially stepping into the seller’s mortgage obligations as if the mortgage was originally yours.
The most important difference between a subject to and an assumable loan is that an assumable loan is initiated with the full knowledge of the mortgage lender.
In this situation, the interest rate should remain the same. You will assume legal ownership of the mortgage minus what is already paid.
For example, if the seller has paid off 5 years of a 30-year mortgage, then you are only contractually liable to pay off the next 25 years.
Unless it is specifically stipulated in the mortgage contract, most mortgages are not assumable. Usually, only FHA, USDA, and VA mortgages are assumable.
Almost all traditional mortgage loans are not assumable. Most will feature non-assumable stipulations in the contract.
Here's where many buyers get confused. Conventional loans from banks typically include "due on sale" clauses that give the lender the right to demand full payment if ownership changes. FHA loans, backed by the government, often allow assumptions with lender approval and qualification. The assumption process involves credit checks and formal approval, essentially like applying for a new loan except you're taking over existing terms.
Now that we understand that distinction, it’s time to consider the pros and cons of buying a home subject to an existing loan.
You may be able to save anywhere between $257 to $3,084 annually on your mortgage payments by buying a home subject to an existing loan.
The exact amount you may save on mortgage costs will ultimately depend on your own personal circumstances.
For most mortgage applications, you need a credit score of at least 620 before you can even apply. A seller may be amenable to a subject to mortgage arrangement to help salvage their credit score.
Additionally, even though you are not legally responsible for the mortgage, as long as you continue paying the seller’s mortgage, you are helping them to continuously build or rehab their credit.
Consider current market conditions too. If the seller locked in a 3% interest rate two years ago and today's rates sit at 7%, you're potentially saving thousands annually. That rate differential alone might justify the added complexity.
This rate spread is one of the strongest motivators for subject-to deals in today’s high-rate environment. Instead of chasing conventional financing at 7% or more, buyers can step into yesterday’s more favorable terms.
Sellers who are struggling to attract traditional buyers may also see subject-to arrangements as a way to move their property faster, particularly if their mortgage terms are significantly better than what’s currently available in the market.
Buying a home subject to an existing loan also expedites the time it takes to close a sale. It typically takes about 56 days to sell a home on the open market, although it can take much longer than that.
It’s much easier to qualify for a mortgage under this unofficial arrangement as well.
Related: How to Get a Mortgage: What You Need To Know
Trying to buy a home subject to an existing loan can be an extremely complicated process if you don’t know what you are doing.
For one thing, the seller will have to deal with foreclosure if you stop paying the mortgage. In that event, there is nothing keeping the seller from informing the mortgage lender of the informal arrangement. A lawsuit could result.
If the mortgage lender found out about your arrangement, they could expedite the entire mortgage’s full payment as soon as possible. You still wouldn’t be liable to pay it, but this scenario would be a big mess for everyone involved.
Let's be clear about what "calling the loan due" means. The lender can demand the full remaining balance immediately. If you owe $200,000, they want $200,000 now, not over 25 years. Most buyers can't produce that kind of cash, forcing either refinancing or sale.
Insuring the home wouldn’t be impossible but could become very complicated to accomplish under this scenario. How would you deal with a claims adjuster in the event of an incident? Additionally, such a situation is another way for the original mortgage lender to find out.
The seller keeps liability for the debt, which affects their credit and borrowing capacity. They can't qualify for another purchase money loan while carrying this mortgage debt. If you default, their credit suffers, not yours.
Unless you and the seller work together and constantly stay on the same page, there are just too many ways for the original mortgage lender to find out.
Before committing to buying subject to an existing loan, explore alternatives like lease-to-own arrangements or seller financing options that might meet your needs with less risk.
Related: Buying A Second Home: How To Finance
Ready to explore your home financing options? Get expert guidance on the best mortgage strategy for your specific situation.
There are many ways to buy a home. Make sure that you fully understand your options before you begin considering the more unconventional home buying options.
Subject-to transactions aren't inherently good or bad, they're tools that work in specific situations. The key is honest assessment of your circumstances, risk tolerance, and alternatives. If you have steady income but imperfect credit, consider FHA loans with lower down payment requirements. Whatever path you choose, work with professionals who understand the implications.
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