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