Subject-To and Due-On-Sale Basics
Subject-To and Due-On-Sale Basics
Information, not legal advice. Laws change; check the current statute or rule and talk to a Texas attorney before you act.
A "subject-to" purchase is a sale where the buyer takes the deed but the seller's existing mortgage stays in place. The loan is not paid off and is not formally assumed. The buyer makes the payments, and the loan stays in the seller's name. Investors like it because the seller's low rate and payment stay with the house. Sellers agree to it when they need out fast, are behind on payments, or have little equity to sell into.
The structure is legal to sign in Texas. The main risk is contractual: most mortgages let the lender call the full balance due when the house is sold. That is the due-on-sale clause. This article explains what that clause does, what federal law says about it, and the Texas rules that apply when an encumbered house changes hands.
How a subject-to deal is put together
A typical Texas subject-to closing has these pieces:
- A deed from seller to buyer (often a warranty deed or special warranty deed), recorded with the county clerk.
- The existing deed of trust stays recorded. The seller's note and lien are untouched.
- An agreement between buyer and seller on who pays the loan, taxes and insurance, what happens if payments are missed, and how loan information is shared.
- Insurance changes. The insurance policy has to reflect the new owner, and the lender's interest has to stay protected. How that is handled varies by insurer and is a common place for mistakes.
- A title company or attorney to close, check other liens, and record documents.
The seller stays liable on the note. If the buyer stops paying, the seller's credit takes the damage and the lender can foreclose. That is why careful buyers set up payment tracking, give the seller loan-status access, and put the payment obligation in writing.
What the due-on-sale clause does
Most residential deeds of trust contain a transfer clause. The standard Texas uniform deed of trust (Fannie Mae/Freddie Mac Form 3044) has one: if the property or an interest in it is transferred without the lender's consent, the lender may require immediate payment in full.
Two points matter:
- It is an option, not an automatic event. The clause lets the lender accelerate. It does not make the loan due by itself.
- It is enforceable. Federal law, the Garn-St Germain Depository Institutions Act of 1982, lets lenders enforce due-on-sale clauses (12 U.S.C. §1701j-3(b)(1)). Before 1982 some states limited them; that law largely ended those limits.
If a lender calls a loan, the owner generally has to pay it off (often by refinancing or selling) or face foreclosure. How often lenders actually call performing loans after a transfer is not something any public statistic we know of measures reliably, so treat the risk as real and plan an exit.
The federal exemptions (and why most investor deals don't fit)
Garn-St Germain lists transfers where a lender may not use the due-on-sale clause, for residential property of fewer than five units (12 U.S.C. §1701j-3(d)). They include:
| Protected transfer | Plain English |
|---|---|
| A subordinate lien that doesn't transfer occupancy | Taking out a second mortgage |
| A purchase-money security interest for household appliances | Financing a fridge |
| Transfer on death of a joint tenant | Survivorship |
| A lease of three years or less with no option to purchase | An ordinary rental |
| Transfer to a relative because of the borrower's death | Inheritance |
| Transfer where the spouse or children become owners | Family transfers |
| Transfer to a spouse from a divorce decree or settlement | Divorce |
| Transfer into a living trust where the borrower stays a beneficiary and occupancy doesn't change | Estate planning |
The federal regulation that carries these out applies them to loans on a home occupied or to be occupied by the borrower (12 C.F.R. §191.5(b)).
A sale to an unrelated investor is not on the list. Neither is a lease with an option to buy. So a standard subject-to purchase, or a lease-option on a subject-to house, gives the lender the right to accelerate. Some investors deed the property into a land trust; whether that fits the living-trust exemption depends on the facts (the borrower must remain a beneficiary and occupancy must not transfer), and it is not a general workaround.
Texas rules that apply to the transfer
Property Code §5.016 notice. When someone conveys residential property that still has a lien on it, Texas requires a separate written disclosure, in at least 12-point type, to the buyer and to each lienholder, at least seven days before the earlier of the closing or a binding contract. It covers the lien, the balance, the rate, the payment, whether the lienholder consented, insurance, and taxes due. If it isn't given, the buyer may terminate the contract within seven days of getting it (Prop. Code §5.016). There are exemptions, including when the buyer gets a title insurance policy and when the buyer has done four or more such transactions in the prior 12 months (§5.016(c)). In a subject-to deal the investor is usually the buyer, so read the exemptions carefully before deciding the notice isn't needed.
Reselling on terms. If the investor later sells the house on terms while the original loan stays in place, different Texas laws apply. A wraparound sale falls under Finance Code ch. 159. A lease-option or contract for deed falls under Property Code ch. 5, subchapter D, which generally bars an executory contract on a house with an existing lien the seller didn't place. See wraparound mortgages in Texas and executory contracts and lease-options.
Foreclosure timeline if payments stop. If the loan defaults, the lender usually forecloses without a court under Prop. Code §51.002. See Texas non-judicial foreclosure.
Questions to answer before you sign
- Is the loan current? If not, what is the reinstatement figure, and is a sale already posted?
- What other liens exist (taxes, HOA, judgments, a second mortgage)?
- How will insurance be written so the house, the buyer and the lender are covered?
- What happens if the lender accelerates: refinance, sale, or payoff from reserves?
- Does the seller understand, in writing, that the loan stays in their name?
- Is the seller in an active bankruptcy? (The automatic stay can affect the transfer; see bankruptcy and the automatic stay.)
How this shows up in Agentix Data
Agentix Data does not carry mortgage or deed-of-trust data, so it can't tell you a loan's rate, balance or lender. What it does show are the situations where subject-to conversations tend to start: posted foreclosure-sale notices in Kaufman and Rockwall counties, Harris County foreclosure suits, tax delinquency and tax suits, probate, divorce filings, and absentee ownership, all linked to the parcel and refreshed each morning. Confirm the loan itself from the recorded deed of trust and the seller's statements.
Sources
- 12 U.S.C. §1701j-3 (Garn-St Germain due-on-sale provisions): https://www.law.cornell.edu/uscode/text/12/1701j-3
- 12 C.F.R. §191.5 (limits on exercising due-on-sale clauses, owner-occupied homes): https://www.law.cornell.edu/cfr/text/12/191.5
- Texas Property Code §5.016 (conveyance of residential property encumbered by lien): https://texas.public.law/statutes/tex._prop._code_section_5.016 and https://statutes.capitol.texas.gov/Docs/PR/htm/PR.5.htm
- Texas Property Code §51.002 (sale of real property under contract lien): https://statutes.capitol.texas.gov/Docs/PR/htm/PR.51.htm
- Texas Finance Code ch. 159 (wrap mortgage loans): https://statutes.capitol.texas.gov/Docs/FI/htm/FI.159.htm
- FHFA, Form 3044 Texas Deed of Trust (uniform instrument): https://www.fhfa.gov/mortgage-translations/document/form-3044-texas-deed-of-trust
General information, not legal or financial advice.