Subject-to vs seller financing vs a wrap: which fits the seller?
By Josh MillerUpdated 5 min readSubject-to fits a seller with a loan and little equity who needs out now; seller financing fits a seller who owns the house free and clear, or close to it, and wants monthly income instead of a lump sum; a wrap fits a seller with both a low-rate loan and real equity who wants income on that equity. Subject-to and a wrap both leave the seller's loan in place, so both carry the due-on-sale risk; plain seller financing on a free and clear house doesn't.
Three creative-finance deals get mixed up constantly, because all three let you buy without a bank loan. They fit very different sellers. Pick the wrong one and you either can't get the seller to yes, or you get to yes on a deal the seller will regret.
This is not legal advice. Use a real estate attorney in your state before you sign anything.
The three, side by side
| Subject-to | Seller financing | Wrap | |
|---|---|---|---|
| Seller's existing loan | Stays, in the seller's name | None, or paid off at closing | Stays, in the seller's name |
| Who you pay | The seller's lender | The seller | The seller, who pays their lender |
| Deed goes to you? | Yes | Yes | Yes |
| Seller gets | Out from under the payment, maybe some cash | Down payment plus monthly payments with interest | Down payment plus the spread between the two loans |
| Due-on-sale risk | Yes | No, if free and clear | Yes |
| Seller holds a lien? | No | Yes, a note and mortgage or deed of trust | Yes |
| Fits a seller who | Has little equity and needs out now | Owns it outright and can wait for income | Has a low-rate loan and real equity |
Subject-to: the seller who needs out
You take the deed and start making the seller's loan payments. The loan stays in the seller's name. It's the deal for an owner with little equity, often behind on payments, who wants the house and the payment gone. The seller gives up the house to save their credit, and has to trust you to keep paying. How to write that offer.
Seller financing: the seller who can wait
The seller is the bank. You put money down, sign a note, and pay the seller monthly with interest, and the seller holds a mortgage or deed of trust on the house until you pay it off. It works best when the house is free and clear, because there's no lender above the seller to call anything.
The seller who says yes is usually older, owns outright, and wants steady income more than a lump sum, or wants to spread out the tax on the sale. Free and clear owners are a huge list. Across 2,170 counties, about 1.5 of every 100 sold off-market within a year, so most of them aren't selling, and the ones who are often want terms more than a cash price. Should you mail them?
A wrap: the seller with both
A wrap is seller financing on top of an existing loan. The seller carries a new note to you at, say, 7%, while their own 3% loan stays in place underneath. You pay the seller; the seller pays their lender and keeps the difference. The seller earns income on their equity and on the rate gap.
The catch: the original loan is still there, so the due-on-sale clause still applies, and if the seller stops forwarding your payments, their lender forecloses on a house you own. A wrap needs a third-party servicer collecting from you and paying the underlying lender directly, so the money can't stop in the middle.
The rules that change by buyer
If the buyer will live in the house, federal lending rules can treat a seller who finances as a loan originator unless an exemption fits (12 CFR 1026.36). An investor buying for business purposes generally sits outside those consumer rules. Some states add their own requirements on seller-financed sales either way, especially Texas, where executory contracts for a home have their own subchapter of the Property Code. Have an attorney pick the structure with you.
Match the deal to the seller you're talking to
Ask two questions on the first call: how much do you owe, and do you need the money now or over time? Little owed and money over time points to seller financing. A low-rate loan, real equity and money over time points to a wrap. Owing close to what it's worth and needing out now points to subject-to.
Questions investors ask
What is a wrap mortgage?
The seller sells you the house and carries a new loan to you, while their own mortgage stays in place underneath it. You pay the seller; the seller keeps paying their lender out of what you pay. The seller earns the difference between your rate and theirs.
Does seller financing have a due-on-sale problem?
Not if the house is free and clear, because there's no lender to call a loan. If the seller still has a mortgage and carries financing on top of it, that's a wrap, and the original lender's due-on-sale clause still applies.
Are there federal rules on seller financing?
For a buyer who will live in the house, yes: federal lending rules can treat the seller as a loan originator unless an exemption applies (12 CFR 1026.36). An investor buying for business purposes is generally outside those consumer rules, but states add their own, so have an attorney check.
Which is better for the seller, subject-to or seller financing?
Seller financing usually, if the seller can afford to wait: they get monthly income and keep a lien on the house. Subject-to helps a seller who can't wait and has little equity, but leaves the loan in their name.