Subject to real estate (sub2): how the deals work and the due-on-sale risk

What subject-to means in real estate

Subject-to real estate is buying a property "subject to" its existing financing: title moves to the buyer, the seller's mortgage is not paid off, and the buyer makes the payments. Sub2, sub 2, subject 2 and subto are shorthand for the same thing, and a sub2 deal, subject-to deal or subject-to home purchase all describe it. Subject-to investing is building a rental portfolio or a wholesale business on these deals.

Sub2 tends to fit three situations:

• Little equity. The seller owes close to the value, so a listing wouldn't cover commissions and costs.
• Behind on payments. The seller wants out before a foreclosure, and arrears can be cured at closing.
• A low rate. The existing rate is well below today's. Freddie Mac's 30-year average was 7.28% as of October 1, 2026 (Freddie Mac PMMS, checked Oct 2026).

Subject-to financing isn't a loan

What doesn't change matters more than what does. The loan stays in the seller's name, the seller's promise to repay stays in force, and the lender's consent isn't obtained. So "subject-to financing," "sub to financing" or a "sub2 loan" isn't a loan product you apply for; it's the seller's existing loan, which you take the house subject to. No lender checks your credit, which is also why no lender has agreed to you.

Other meanings of "subject to"

In a listing or purchase contract, "subject to" can also mark a condition: "subject to inspection," "subject to appraisal" or "subject to financing" in the sense of a financing contingency. Those clauses are contingencies, not subject-to deals. The rest of this page is about the investor strategy.

How a sub2 deal is structured

A sub2 deal is a normal purchase with a deed and a closing, plus paperwork for the loan that stays in place.

The subject-to contract

A subject-to contract is a standard purchase agreement plus a subject-to addendum, and the wording that holds up depends on your state, so have a local attorney draft it rather than downloading a sub2 contract template. Make sure it covers:

• The loans: each loan that stays in place, with servicer, balance and payment as of a stated date.
• Price and cash: the price, the cash to the seller, and who pays arrears and closing costs.
• Payments: who pays the mortgage, taxes and insurance from closing on, and how the seller can see that they were paid.
• The due-on-sale acknowledgment: that the loan stays in the seller's name and the lender can call it due.
• Default: what happens if payments stop, and how either side is notified.
• Assignment: whether you may assign the contract, and the disclosures your state requires if you do.

The due-on-sale clause

A due-on-sale clause lets the lender, at its option, demand the full balance if "all or any part of the property, or an interest therein" is sold or transferred without its prior written consent, and federal law lets lenders enforce it regardless of state law (12 U.S.C. 1701j-3, checked Oct 2026). A subject-to deal is that kind of transfer. The same statute says a lender "is encouraged to permit an assumption," but doesn't require it.

For loans on homes with fewer than five units, the statute lists transfers where the lender may not use the clause. The main ones are below, and a sale to an investor isn't among them:

The OCC's implementing rule narrows these further. Its protections apply to loans on a home "occupied or to be occupied by the borrower," the trust exemption requires the borrower to remain "the beneficiary and occupant," and a lease longer than three years or with an option to purchase "will allow the exercise of a due-on-sale clause" (12 CFR 191.5, checked Oct 2026). Read against that text, putting title in a land trust and handing the beneficial interest to an investor is not the same as the trust exemption. The clean alternative is a formal assumption: under the same rule, when the lender and the new owner agree in writing before the transfer, the lender waives the clause and releases the seller.

If the loan is called, someone has to pay it off by refinancing or selling, or the lender can foreclose. Plan that exit before you sign.

Sub2 vs seller financing vs wrap

These structures are often lumped together as creative financing, but they differ on who owes the lender and whether the lender agreed.

Seller financing has its own federal rules. Under the CFPB's Regulation Z, a person who seller-finances three or fewer properties they own in any 12 months, with fully amortizing financing, a good-faith ability-to-repay check and a fixed rate (or one that adjusts only after five or more years), among other conditions, is not treated as a loan originator (12 CFR 1026.36, checked Oct 2026). A wrap is a form of seller financing, so check the same rules for the seller's note.

Worked example: a sub2 deal in numbers

Sub2 math compares the payment a buyer inherits with what new financing would cost, then adds up the cash needed to close. Figures are example assumptions except the loan math and the Freddie Mac rate. [Seller name] took a $230,000, 30-year fixed loan at 3.25% and has made 66 payments. They're three payments behind and relocating.

Why a buyer pays for it:

• Payment. A new 30-year loan for $202,700 at Freddie Mac's 7.28% average would cost about $1,387 a month in principal and interest, $386 more than the existing note.
• Cash flow. At an assumed $2,000 rent with a $200 reserve for vacancy and repairs, the house clears about $449 a month: $2,000 minus $1,351 minus $200.
• Equity. Value minus balance is $47,300 before selling costs.
• Your fee. Assign the contract for $8,000 and the end buyer brings $17,800 in total.
• Stress test. If the lender calls the loan and the buyer refinances at 7.28%, the payment becomes about $1,737 with escrow, and cash flow drops to about $63 a month. That's the number to show buyers before they commit.

Risks for the seller

The seller carries most of the long-term risk in a sub2 deal, which is why disclosure and paperwork matter so much:

• They stay liable. The loan remains in their name. If payments stop, the lender can pursue the debt and foreclose on the house.
• Their credit takes the hit. Late payments on the loan land on the seller's credit. Federal law generally bars credit reports from listing adverse items more than seven years old, so a late payment can follow them for years, and that limit doesn't apply to reports for credit of $150,000 or more (15 U.S.C. 1681c, checked Oct 2026).
• The loan can be called. If nobody pays off a called loan, the foreclosure is on the seller's record.
• Their next loan. The old mortgage still appears on their credit report when they apply to borrow again; they should ask a loan officer how it will be counted.
• Foreclosure-rescue laws. States can add rules for buying from owners in foreclosure. California's Home Equity Sales Contracts Act applies to buyers who acquire title to an owner-occupied one-to-four-unit home with a recorded notice of default (with exceptions, such as buying it to live in), and the seller can cancel until midnight of the fifth business day after signing, or 8 a.m. on a scheduled foreclosure sale day if that comes first (Cal. Civ. Code 1695.1 and 1695.4, checked Oct 2026).
• Insurance. Confirm with an insurance agent that the house stays covered after the deed changes.

How to find subject-to sellers

Sub2 sellers are owners with a mortgage and a problem: little equity, missed payments or a move they can't wait on. Look where those owners show up:

• Pre-foreclosure owners, with the foreclosure-rescue laws above in mind.
• Inbound leads who reject your cash offer because they owe more than you offered. Ask about the loan before you end the call.
• Tired landlords whose rent barely covers the payment.
• Relocating owners who can't sell fast enough for what they owe.
• Inherited houses that still carry a mortgage.

Qualify every sub2 lead with the same questions: balance, rate, payment with escrow, months behind, loan type, servicer, other liens and the reason for selling. Our guide to motivated seller leads covers where these lists come from, and skip tracing for real estate covers finding owners' phone numbers. Check Do Not Call and consent rules before you call or text anyone on a list.

If the seller has real equity and the house only needs light work, a novation may net them more than sub2 would.

How wholesalers pass sub2 deals to buyers

To pass a sub2 deal, you assign the purchase agreement to an investor who closes, takes the deed and takes over the payments. Creative buyers want the terms up front: loan balance, rate, payment with escrow, remaining term, arrears, entry fee (cash to close including your fee), as-is value and a rent estimate. Keep the seller's name, loan number and statements off any marketing page and share them only with a buyer who is ready to close.

In Find you can tag the buyers who take sub2 deals, publish a branded dispo page for the deal with photos and the terms in its description, and send it to that tag with "Market this deal"; the deal shows which buyers replied. Find doesn't match buyers to deals automatically, and it doesn't check whether your structure fits your state's law.

Assigning a sub2 contract is wholesaling, and state wholesaling laws can apply. Oklahoma, for example, since November 1, 2025 counts anyone who signs a contract to buy a home intending to assign it before taking ownership as a wholesaler, with written disclosures and a two-business-day cancellation right (Oklahoma SB 1075, checked Oct 2026). Check the rules in your state before you assign.