Understanding Subject-To and Wraparound Offers: A Guide for Home Sellers

Sep 03, 2024

Subject-to and wraparound offers allow buyers to take over payments on your existing mortgage without formally assuming it, but the mortgage remains in your name. While these offers might be attractive to some sellers, they carry significant risks due to the "due on sale" clause, which could trigger full repayment if the lender is not informed. These options are often targeted at properties with low interest rates or sellers in financial distress. Consulting a real estate attorney is essential to fully understand the implications before proceeding.

Key Takeaways

Buyers take over payments on your mortgage without assuming it, but the mortgage remains in your name.
The "due on sale" clause may let lenders demand full repayment if the property is sold without their consent.
Always consult a real estate attorney to understand the risks before accepting these offers.

What Are Subject-To and Wraparound Offers?

Subject-To Offers: In a subject-to transaction, the buyer takes ownership of your property, but the mortgage remains in your name. The buyer agrees to make payments on your existing loan without formally assuming it. This approach has gained attention through social media platforms like TikTok and Instagram.

Wraparound Offers: With a wraparound mortgage, you keep your current mortgage and offer a new loan to the buyer. This new loan covers the remaining balance of your mortgage plus any extra needed for the purchase. The buyer pays you monthly, and you continue paying your original mortgage, potentially benefiting from the interest rate difference.

Key Considerations: Due on Sale Clauses

Both subject-to and wraparound offers require careful consideration of the "due on sale" clause in your mortgage. This clause allows the lender to demand full repayment if the property is sold without their consent. Most mortgages include this clause, so it's crucial to verify its presence before proceeding with these offers.

Why You Might Receive These Offers

Investors often target properties with low interest rates, short purchase-to-sale timelines, or sellers in financial distress. Homes needing significant repairs or those bought during the pandemic with low rates are also attractive. In areas like Austin, where property values appreciate steadily, these offers are common.

Handling Subject-To and Wraparound Offers

Both types of offers carry risks, such as ongoing mortgage responsibility and potential credit issues. Your mortgage remains in your name, which can complicate future financing. While these offers might seem appealing, it's essential to consult a real estate attorney. Discuss these options with your agent before listing and prepare a standard response to decline them if they're not suitable for you.

Why This Matters

If a lender discovers a subject-to or wraparound transaction, they might enforce the due on sale clause, requiring you to pay off the loan. Although some lenders may overlook this if payments are on time, it's not guaranteed, leaving you liable. Consulting a real estate attorney helps you understand the risks and make informed decisions.

About the Author

Last updated: 09/03/2024

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Jian M.

This review is about Joe Gage, their real estate agent. I'm based in Sam Francisco and was looking for investment property in Austin. I tried out three different agents based on recommendations from different sources, including Yelp. Joe clearly stands out. He's very patient and responsive. I'm not familiar with the area at all thus had a lot of questions. His email reply contains detailed information of the neighborhood, including shops nearby, schools and so on. He regularly screen houses and give recommendations once he sees a good fit for investment house offered at reasonable price. He's very knowledgeable about the area. All his recommendations comes with details around why he thinks it's a good investment and sales/rental data in the neighborhood to justify the price he thinks it's worth as well as the expected rental income. I found him to be very methodical and organized. He's not a typical sales person. Maybe this is because he used to be an accountant. Needless to say he earned our trust and we went with him to make the purchase. I was very impressed through the whole process. He's very calm and never pushy. His recommendation on the bid price was right on and he was very good at following up with various parties to push things through. The process went through very smoothly. If anyone is looking for a good real estate agent in Austin, I'd recommend Joe whole-heartedly. His professionalism and calm personality make him a real pleasure to work with.

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