Insurance, escrow and the servicer after a subject-to closing
By Josh MillerUpdated 5 min readAfter a subject-to closing, put a new insurance policy on the house effective the day you close with the lender listed as mortgagee, set up a way to see the loan's statements and escrow notices, and pay the full monthly payment on time from the first month. Most subject-to deals that go wrong go wrong here, in the paperwork after closing, not at the closing table.
The closing feels like the finish line. On a subject-to deal it's the start of years of paying someone else's loan, and the first few weeks decide whether that goes smoothly. Here's what to set up. This is general information, not legal or tax advice. Use a real estate attorney in your state before you sign anything.
Week one: insurance with no gap
- A new policy, effective the day you close. You own the house now; the seller's policy may not cover you.
- The lender as mortgagee. The loan requires it. Your agent will need the loan number.
- The seller's policy stays until yours starts. A gap of even a few days is a risk.
- Proof to the servicer. If the lender doesn't see coverage, it can buy force-placed insurance, at a much higher price, and add it to the loan. That letter is also the one that tells a lender the house changed hands.
Escrow: the payment that changes
Most loans collect property taxes and insurance in escrow with each payment. Once a year the servicer runs an escrow analysis and resets the payment. If taxes or insurance went up, the payment goes up, sometimes with a shortage to make up.
- Expect the analysis letter once a year and read it.
- Change the amount you pay the same month the new payment starts.
- If you pay the insurance yourself, send the servicer the declarations page every renewal.
The servicer's mail
Every statement and notice goes to the borrower, who is still the seller. That's the weak point in every subject-to deal. Fix it in writing at closing:
- A signed third-party authorization from the seller, on file with the servicer, so you can call about the account.
- An online login to the loan account, if the seller agrees, so you see what the servicer sees.
- An agreement that the seller forwards anything from the servicer within a few days.
Watch for a notice of servicing transfer. Loans get sold, and federal rules generally require notice at least 15 days before the new servicer takes over. Payments sent to the old servicer after that can go missing.
Paying, every month
- Pay the full payment, including escrow, from an account you control.
- Pay a few days early. A late payment hits the seller's credit, not yours.
- Keep a record of every payment. If the seller ever asks, you can show them.
Keep the seller in the loop
A seller who hears from you once a quarter, with proof the loan is current, is a seller who doesn't panic when a letter from the lender shows up. That's also the best protection you have.
Questions investors ask
How do I insure a house I bought subject-to?
With a new policy that starts the day you close, covering you as owner, with the existing lender listed as mortgagee as the loan requires. Ask your attorney and insurance agent how to name the seller. Don't let the seller's policy lapse before yours starts.
What is force-placed insurance?
If the lender doesn't see proof of coverage, it can buy insurance on the house and add the cost to the loan. It usually costs much more and protects the lender, not you. A lapse can also draw attention to the transfer.
Who gets the mortgage statements after a subject-to deal?
The borrower, the seller, unless the servicer changes the mailing address. Agree in writing how you'll get every statement and notice, and get the seller's written authorization so you can talk to the servicer about the account.
What happens when the loan servicer changes?
Loans get sold. Federal rules require notice of a servicing transfer, generally at least 15 days before it takes effect, sent to the borrower. If you miss that notice, you could send payments to the wrong company.