The 'Subject-To' Real Estate Guide. How to Buy Homes with 3% Mortgages in a 7% World

🏠 The Real Estate Paradox of 2026

The golden era of 3% interest rates is long gone. In today's market, investors are grappling with stabilized but elevated mortgage rates of 7-8%, which effectively suffocates cash flow for most rental properties.

If you finance $500,000 at 7.5%, your monthly interest-only cost exceeds $3,000. Profitability becomes nearly impossible using traditional leverage.

But what if you didn't have to originate a new loan? What if you could essentially "take over" a seller's seasoned 2021 mortgage locked in at 3%? This is not a fantasy. It is a sophisticated, albeit advanced, strategy known as Buying Subject-To.

How to Buy Homes with 3% Mortgages in a 7% World

How It Actually Works

"Subject-To" implies purchasing a property subject to the existing financing remaining in place. It involves legally bifurcating the ownership into two distinct components:

• 1. The Deed (Ownership): The seller transfers the deed to YOU (or your Land Trust/LLC). You possess full legal title. You control the asset, the renovation, and the tenant selection.
• 2. The Mortgage (Debt): The underlying loan remains in the SELLER'S name. You do not formally assume the liability. However, you contractually agree (via a servicing arrangement) to make the monthly payments on their behalf.

Why Would a Seller Agree to This?

This is the most common objection. Why would a seller trust a stranger to pay their mortgage? This strategy is generally not for sellers with significant equity or no timeline pressure. It is designed for Distressed Sellers.

• Pre-Foreclosure: They are behind on payments. You cure the default and keep the loan current, which can help rehabilitate their damaged credit.
• Low to Negative Equity: If they sell via a traditional agent, the 6% commission and closing costs mean they must bring cash to the closing table. Selling to you "Subject-To" costs them $0 out of pocket.
• Divorce/Rapid Relocation: They require an immediate exit and cannot afford the uncertainty of a 60-day closing period.

The Primary Risk ("Due-on-Sale" Clause)

Virtually every modern mortgage contains a clause stating: "If any interest in this property is transferred, the Lender may require immediate payment in full."

This is the "boogeyman" of Subject-To investing. If the bank discovers the title transfer, they can accelerate the loan and demand the full payoff.

⚠️ How Professionals Mitigate This Risk

1. Land Trusts: Transferring the deed to a trust (e.g., "123 Main St Trust") rather than an LLC can provide a layer of privacy. While not a guaranteed shield against the Due-on-Sale clause, it draws less attention than a corporate transfer.
2. Servicing Companies: Use a third-party loan servicing company to withdraw funds from your account and pay the lender. This ensures professional consistency and reduces seller anxiety.
3. Insurance Structuring: Rather than simply cancelling the seller's policy (which triggers a notice to the lender), professionals often obtain a new policy listing the lender as the "Mortgagee" and the new owner as the "Insured." Correctly structuring this is vital to avoid flagging the system.

🛑 State Law Warning (TX, NC, CA): Real estate laws vary significantly.
• Texas: Under Texas Property Code § 5.016, you must provide specific disclosures to the lender and buyer. Failure to comply can lead to severe penalties.
• North Carolina: Has strict "Equity Skimming" laws regarding taking over payments.
• General: Always ensure you are not violating state-specific consumer protection acts (e.g., California's foreclosure consultant laws).

Checklist

Do not attempt this on a kitchen table. You require a Transaction Coordinator or Real Estate Attorney who specializes in creative finance.

1. Authorization to Release Information. Obtain the seller's signature on this form to verify the exact loan balance, interest rate, and reinstatement amount with the lender.
2. Title Search. Non-negotiable. Ensure there are no secondary liens, IRS attachments, or mechanics liens. You are buying the property "Subject-To" all encumbrances.
3. The Documents. Required documents include the Deed, the Subject-To Addendum, and a "Due-on-Sale Disclosure" (ensuring the seller acknowledges the loan remains in their name).
4. Limited Power of Attorney. This grants you the authority to communicate with the lender and insurance carrier regarding this specific property, removing the seller from future administrative burdens.

🛡️ Chief Editor’s Verdict

The best deals in 2026 are found, not created.

"Subject-To" remains one of the few viable methods to cash flow in high-interest markets. It is risky, yes, but that risk is manageable with competent legal counsel.

The Golden Rule: Always possess an exit strategy. If the bank calls the loan due, do you have the reserves to refinance or the equity to sell? If the answer is no, walk away.

Disclaimer: This article is for educational purposes only and does not constitute legal or financial advice. "Subject-To" transactions may violate the "Due-on-Sale" clause of the original mortgage contract, potentially allowing the lender to foreclose. Laws regarding these transactions vary by state (especially in TX, NC, and CA). Always consult with a qualified real estate attorney before entering into any creative financing agreement.