Subject-To Financing

Legal information, not legal advice. Verify against the cited primary sources before acting. The rules below turn on federal due-on-sale law plus state-specific wrap/encumbrance statutes that are amended often. Last verified: 2026-06-08.

• What it is: A “subject-to” purchase is one where the buyer takes title to (or, in the contract-for-deed setting, takes possession and equitable ownership of) property while the seller’s existing mortgage stays in place and in the seller’s name — the buyer makes payments that service that loan, but the loan is not paid off and is not formally assumed. The buyer takes subject to the lien. A close cousin is the wrap-around (“wrap”): the seller finances the buyer for a new, larger obligation (often a CFD or a wrap note) that “wraps around” the still-outstanding senior loan; the seller collects the buyer’s payment, keeps the spread, and (is supposed to) keep paying the senior lender. In both structures the senior loan survives the sale and the seller remains the borrower of record.

• Why it matters for contract-for-deed: Selling on a contract for deed is one of the most common ways the subject-to / wrap structure is implemented, because a CFD lets the seller convey possession and equitable title without recording a deed or triggering an obvious payoff. That convenience is also the risk: the CFD is a “sale or transfer” of an interest in the property, so it can trigger the senior lender’s due-on-sale clause (the loan becomes callable), and several states separately regulate or restrict selling encumbered property on terms — capping how much the seller may owe, forcing the seller to apply payments to the senior loan, requiring lender consent, or imposing wrap-specific licensing and disclosure. Three distinct risk vectors stack on every subject-to/wrap CFD: (1) due-on-sale acceleration (federal), (2) insurance failure (the policy follows the seller’s name and may not cover the buyer’s loss), and (3) disclosure liability (failing to tell the buyer about the wrapped lien, or failing the state’s wrap-disclosure statute).

• The three risk vectors, in order of how often they bite:

  1. Due-on-sale (the uniform federal floor). Under garn-st-germain-due-on-sale (12 U.S.C. § 1701j-3), a due-on-sale clause is federally enforceable “notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary” (§ 1701j-3(b)(1)), and state anti-acceleration doctrine is preempted. The clause fires on a transfer of “all or any part of the property… sold or transferred without the lender’s prior written consent” (§ 1701j-3(a)(1)). The nine residential exemptions in § 1701j-3(d) are estate-planning and family transfers (death, divorce, junior liens, a settlor-beneficiary inter vivos trust, a lease of three years or less without a purchase option) — none of which covers an arm’s-length sale on terms to a CFD buyer. A land trust does not cure this unless the borrower remains the beneficiary and occupant. So the standard subject-to/wrap CFD is outside every exemption, and the senior lender may call the loan at its option, at any time, even while payments are current.
  2. Insurance. Hazard insurance is written on the named insured — the seller-borrower. After a subject-to sale the buyer has the loss exposure (equitable owner in possession) but is not the named insured; a claim can be denied or paid to the wrong party, and the senior lender’s force-placed-insurance and escrow machinery runs against the seller. Texas makes this risk a mandatory written warning in its wrap-disclosure statute (see below); elsewhere it is a contract-drafting problem the operator must solve (additional-insured / dual-interest endorsements, or a new policy in the buyer’s name) rather than a federal one.
  3. Disclosure / over-encumbrance. Several states impose statutory duties specific to selling encumbered property on installments: disclose the senior lien, do not encumber the property above the buyer’s contract balance, apply the buyer’s payments to the senior obligation, and (in two states) obtain lender consent or a wrap-lending license. These are where the cross-state split lives.

• The split across jurisdictions: Subject-to/wrap CFDs are legal in most states but specifically regulated in several, and the federal due-on-sale exposure is uniform everywhere. The regulated states cluster into four postures: near-prohibition (Texas, where a CFD seller must hold fee simple free of liens with only a narrow consent-and-disclosure exception, and wrap lending is separately licensed and disclosure-gated); over-encumbrance / payment-application controls (California’s §§ 2985.1–2985.3 criminal scheme; Ohio’s contract-balance cap); lender-consent-and-disclosure prerequisite for investor sellers (Minnesota § 559A.04); and permitted but governed only by Garn-St. Germain (Maryland, Oklahoma, Florida, Illinois, and most others — no state wrap statute, so federal due-on-sale plus general disclosure/fraud law controls).

• Leading authority: garn-st-germain-due-on-sale (12 U.S.C. § 1701j-3) is the controlling federal authority on the due-on-sale vector; the state wrap statutes below control the encumbrance/disclosure vector. Relationship to forfeiture-vs-foreclosure (the buyer’s equitable interest that is exposed if the senior loan is called), equitable-conversion (why the CFD is a “transfer” for due-on-sale purposes), and the seller-financer licensing overlay in dodd-frank-seller-financing / safe-act-mlo.

▸ For Sellers / Operators — Treat the senior loan’s due-on-sale clause as enforceable and uncured by any structure — land trusts, “subject-to” labels, and wrap notes do not move you into a Garn-St. Germain exemption when you are selling to a third-party buyer who takes occupancy. Before drafting, answer, in order: (1) Does my state restrict the wrap itself? Texas effectively bars a non-consensual underlying-lien CFD (Prop. Code § 5.085) and licenses/regulates wrap lending (Fin. Code ch. 159) — get this wrong and the buyer can cancel and recover everything. California (§§ 2985.2–2985.3) makes over-encumbering, or pocketing the buyer’s payment instead of paying the senior lien, a crime. Ohio caps your mortgage at the contract balance absent the buyer’s consent (R.C. § 5313.02(B)). Minnesota forbids an investor seller from wrapping a due-on-sale mortgage unless the lender has consented/agreed not to enforce and the contract discloses the mortgage and covenants to keep it current (§ 559A.04). (2) Have I disclosed the wrapped lien to the buyer — its holder, balance, terms — and, where required (TX), given the statutory insurance warning and the 7-day pre-closing wrap disclosure? (3) Have I built the payoff plumbing — escrow the senior payment, give the buyer a cure right and proof of payment, carry insurance that actually covers the buyer? The failure mode is not abstract: a called or unpaid senior loan forecloses out the buyer’s equity, and the buyer’s recourse runs against you (rescission, consumer-protection penalties, and in CA criminal exposure). Marketing a wrap as “due-on-sale-proof” is a misstatement of § 1701j-3.

▸ For Buyers — On a subject-to/wrap CFD you take equitable title behind a senior mortgage you do not control and that stays in the seller’s name. If the seller stops paying it, or the lender calls it under the due-on-sale clause, the property can be foreclosed even though your CFD payments are current — your equity is exposed to a loan you cannot directly cure unless the contract gives you that right. Insist on: written disclosure of the senior lien (holder, balance, terms); a payoff/escrow mechanism and proof the senior loan is being paid; a contractual right to cure the seller’s senior default (Texas grants a 150%-deduction cure right by statute); insurance naming you; and recording your interest. Several states give you teeth here — CA criminal liability for a seller who diverts your payments, TX cancel-and-recover for § 5.085 violations, a rescission right under the TX wrap-disclosure statute.

Jurisdiction map

Positions are stated only where a retrieved primary source supports them. The federal due-on-sale exposure (12 U.S.C. § 1701j-3) applies in every jurisdiction and is not repeated per row; see garn-st-germain-due-on-sale. States not listed are not yet classified on the state-statute axis — see needs_verification. Per-state nuance lives on each [[state]] page §5 (Title, Recording & Wraps).

Position	Jurisdiction	Controlling authority (primary source)
Near-prohibition — CFD seller must own fee simple free of liens; underlying lien allowed only on strict consent + disclosure; wrap lending separately licensed & disclosure-gated	texas	Tex. Prop. Code § 5.085 (lien-free requirement + narrow exception); Tex. Fin. Code ch. 159 (§§ 159.051 license, 159.101 disclosure/rescission)
Over-encumbrance & payment-application controls (criminal) — seller may not encumber above the contract balance, must apply buyer’s payments to the senior lien, and may not transfer property without the contract	california	Cal. Civ. Code §§ 2985.1, 2985.2, 2985.3
Contract-balance cap — vendor may not place a mortgage on the property exceeding the balance due on the contract without the vendee’s consent	ohio	Ohio Rev. Code § 5313.02(B)
Investor-seller lender-consent prerequisite — an investor/“multiple seller” may not enter a CFD subject to a due-on-sale mortgage unless the lender consents or agrees not to enforce and the contract discloses the mortgage + covenants to keep it current	minnesota	Minn. Stat. § 559A.04, subd. 1
Permitted; governed by Garn-St. Germain (no state wrap statute) — wraps/subject-to legal, but the senior due-on-sale clause is enforceable and the residential exemptions do not shelter a sale to a third-party buyer	maryland, oklahoma, florida, illinois	12 U.S.C. § 1701j-3 (§§ 1701j-3(a)(1), (b)(1), (d)); state §5 modules note no independent wrap prohibition

How the postures compare

• Near-prohibition (Texas). Two statutes stack. On the sale side, Tex. Prop. Code § 5.085 requires the executory-contract seller to hold fee simple free of liens or encumbrances, with a narrow exception for a pre-existing purchase-money lien only if the seller discloses the loan ≥ 3 days before execution, the lien is limited to the property sold and never exceeds the buyer’s remaining balance, the lienholder consents to the CFD and to accept the buyer’s direct payments, and the contract lets the buyer cure the seller’s default and deduct 150% of amounts paid. Violation is a DTPA act letting the buyer cancel and recover. On the lending side, Tex. Fin. Code ch. 159 (effective Jan. 1, 2022) requires a license to originate/make a wrap mortgage loan (§ 159.051, tying into Fin. Code chs. 156/157/342) and a separate written disclosure statement in ≥ 12-point type on or before the 7th day before the wrap agreement, including a property-insurance warning that the seller’s/lender’s insurance “may not provide coverage to the buyer,” with a borrower right to rescind (§ 159.101). Net effect: a classic non-consensual wrap CFD is very hard to do compliantly in Texas. Sources: Tex. Prop. Code § 5.085; Tex. Fin. Code §§ 159.051, 159.101.

• Over-encumbrance / payment-application controls (California). California does not prohibit the wrap but criminalizes its abuses. Civ. Code § 2985.1 bars transferring the property without the contract (except as security to a senior holder); § 2985.2 makes it a public offense (fine up to $10,000 and/or up to one year) for a seller under an unrecorded sales contract to cause an encumbrance exceeding the contract balance without the buyer’s written consent; and § 2985.3 makes it the same criminal offense to take the buyer’s installment payment while a payment is due on a senior encumbrance and appropriate it to another use instead of paying the senior obligation. The operator duty is concrete: disclose the senior lien, don’t over-encumber, and route the buyer’s money to the wrapped loan. Sources: Cal. Civ. Code §§ 2985.1, 2985.2, 2985.3.

• Contract-balance cap (Ohio). R.C. § 5313.02(B) provides that the vendor may not place a mortgage on the property in an amount greater than the balance due on the contract without the vendee’s consent (with a limited exception where the mortgage blankets additional property and the vendor discloses the total and a release price). This directly constrains a wrap whose senior balance exceeds the buyer’s payoff. Source: Ohio Rev. Code § 5313.02(B).

• Investor-seller consent prerequisite (Minnesota). Minnesota’s multiple-seller statute (§ 559A.04, subd. 1) assumes the wrap risk is real and regulates it for investor sellers: such a seller may not enter a CFD on property subject to a mortgage containing a due-on-sale clause unless it has a binding agreement under which the holder consents to the CFD sale or agrees not to exercise the clause, and the contract discloses the mortgage, promises the seller will meet the mortgage obligations, and states that the binding lender agreement has been obtained. Source: Minn. Stat. § 559A.04, subd. 1.

• Permitted, Garn-St. Germain only (Maryland, Oklahoma, Florida, Illinois, and most states). No state statute independently prohibits the wrap; the deal is legal but the senior loan’s due-on-sale clause is enforceable under 12 U.S.C. § 1701j-3 and the § 1701j-3(d) residential exemptions do not cover an arm’s-length sale to a third-party CFD buyer. The buyer takes subject to the senior lien; disclosure of the wrap to the buyer is essential as a matter of general fraud/consumer-protection law even absent a wrap-specific statute. Source: 12 U.S.C. § 1701j-3.

Primary sources (retrieved 2026-06-08)

• 12 U.S.C. § 1701j-3 (Garn-St. Germain) — § (a)(1) defines the due-on-sale clause; § (b)(1) makes it enforceable “notwithstanding any provision of the constitution or laws… of any State to the contrary”; § (d) lists the nine residential exemptions (estate-planning/family transfers), none covering a sale on terms to a CFD buyer. https://www.law.cornell.edu/uscode/text/12/1701j-3
• Tex. Prop. Code § 5.085 (Fee Simple Title; exceptions) — executory-contract seller must hold fee simple free of liens, with a narrow disclosed-and-consented purchase-money-lien exception (lien ≤ buyer’s balance; lienholder consent to the CFD and direct payments; 150% cure-and-deduct right). https://texas.public.law/statutes/tex._prop._code_section_5.085
• Tex. Fin. Code § 159.051 (License or Registration Required) — a person may not originate or make a wrap mortgage loan unless licensed/registered under Fin. Code ch. 156, 157, or 342 (or exempt). https://texas.public.law/statutes/tex._fin._code_section_159.051
• Tex. Fin. Code § 159.101 (Disclosure Statement; Option to Rescind) — wrap lender must give a separate ≥ 12-point written disclosure ≥ 7 days before the wrap agreement, including the insurance warning (“may not provide coverage to the buyer”); borrower may rescind. https://texas.public.law/statutes/tex._fin._code_section_159.101
• Cal. Civ. Code § 2985.2 — public offense (fine ≤ $10,000 and/or ≤ 1 year) for a seller under an unrecorded real-property sales contract to cause an encumbrance exceeding the contract balance without the buyer’s written consent. https://california.public.law/codes/civil_code_section_2985.2
• Cal. Civ. Code § 2985.3 — same criminal offense to receive the buyer’s installment payment while a senior payment is due and appropriate it to a use other than paying the senior obligation. https://california.public.law/codes/civil_code_section_2985.3
• Ohio Rev. Code § 5313.02(B) — vendor may not place a mortgage on the property exceeding the balance due on the land installment contract without the vendee’s consent (limited blanket-mortgage-with-disclosure exception). https://codes.ohio.gov/ohio-revised-code/section-5313.02
• Minn. Stat. § 559A.04, subd. 1 — investor seller may not enter a CFD subject to a due-on-sale mortgage absent a binding lender consent/non-enforcement agreement plus contractual disclosure and a covenant to keep the mortgage current. https://www.revisor.mn.gov/statutes/cite/559A.04

Meta

• needs_verification:
  • Cal. Civ. Code § 2985.1 exact text (the no-transfer-without-the-contract rule and the senior-lien-security exception) — relied on from the california §5 module and corroborated by the §§ 2985.2–2985.3 scheme, but the verbatim § 2985.1 language was not separately retrieved this run; confirm before quoting.
  • Ohio § 5313.02(B) blanket-mortgage exception — the release-price/total disclosure carve-out is confirmed in substance; confirm the exact statutory wording of the exception before relying on it verbatim.
  • Tex. Prop. Code § 5.016 — the substantive content of the wrap disclosure statement that Fin. Code § 159.101 incorporates by reference; § 5.016 itself was not retrieved verbatim this run (the Texas Legislature Online viewer did not render via fetch). The Finance Code disclosure timing/insurance/rescission facts above are confirmed; the § 5.016 cross-referenced content is not.
  • Classification of the remaining ~50 jurisdictions on the state-statute axis (whether each has an independent wrap/over-encumbrance statute or relies solely on Garn-St. Germain). Maryland, Oklahoma, Florida, and Illinois are placed in the “no independent wrap prohibition” group from their §5 modules; each other state requires its own retrieved statute/case before placement and is left unclassified here rather than asserted. The federal due-on-sale vector, by contrast, applies uniformly.
• open_questions:
  • In the Garn-St.-Germain-only states, does general consumer-protection / UDAP law independently require wrap disclosure to the buyer, or only fraud/omission doctrine? (Normalize on each state page.)
  • Where a state caps the senior encumbrance at the “contract balance” (OH) vs. the buyer’s “remaining balance” (TX § 5.085) vs. forbids over-encumbrance under an “unrecorded” contract only (CA § 2985.2), does recording the CFD change the analysis? (Recording removes CA § 2985.2’s “unrecorded” predicate but not § 2985.3’s payment-application duty.)
• cross_links: garn-st-germain-due-on-sale · forfeiture-vs-foreclosure · equitable-conversion · dodd-frank-seller-financing · safe-act-mlo · texas · california · ohio · minnesota · maryland · oklahoma · florida · illinois
• changelog:
  • 2026-06-08 — Page created. Defined subject-to vs. wrap-around in the CFD context; mapped the three risk vectors (due-on-sale, insurance, disclosure); built the cross-jurisdiction posture map (TX near-prohibition; CA criminal over-encumbrance/payment-application; OH contract-balance cap; MN investor lender-consent; MD/OK/FL/IL Garn-St.-Germain-only) from retrieved primary sources (12 U.S.C. § 1701j-3; Tex. Prop. § 5.085; Tex. Fin. §§ 159.051, .101; Cal. Civ. §§ 2985.2–2985.3; Ohio R.C. § 5313.02(B); Minn. § 559A.04). Flagged § 2985.1, the § 5.016 cross-reference, and the unclassified states under needs_verification.

---

Disclaimer. This page is legal information, not legal advice, and may be out of date. Whether a specific subject-to or wrap-around contract for deed triggers a due-on-sale acceleration, violates a state wrap/encumbrance statute, or fails a disclosure or insurance duty is fact-dependent and turns on statutes that are frequently amended. Confirm the current federal and state text and consult a licensed attorney in the relevant jurisdiction before drafting, marketing, selling, or buying on a wrap or subject-to basis.