Who Makes the First Mortgage Payment After a Sub-To?
Somebody has to, but people forget to discuss it, and it can cause a rocky start to a long relationship.
5 Ways to Cover the First Payment
Direct Online Access (Preferred): If the buyer is allowed to log in to the mortgage portal, just make the payment directly online. It is fast, verifiable, and eliminates extra steps.
(Make sure you're not late just because you set up auto-pay too late. See below.)Seller Pays & Gets Reimbursed: The seller continues with the first ACH payment and receives a credit on the settlement statement at closing. This is low-friction, but requires an able and cooperative seller. And we've seen sellers who failed/refused to make the payment after they got paid at closing...
Check Mailed by the Title Company: The title company handles the payment at closing by sending a check and a copy of the mortgage statement directly to the lender.
Note: Letting the bank see payment from a title company is seen by some as a due-on-sale risk, but I've seen no evidence it actually triggers due on sale.3rd Party Servicer: If you're setting up a 3rd party servicer, that can take 2-4 weeks for the account to go live. And it can take 2 more weeks for the first payment to clear into the servicer before they'll be willing to send a payment out. Don't rely on 3rd party servicing to make a payment sooner than 30-45 days after closing! This is one of those "it's nobody's fault" situations that sill hurts.
Phone Payment: If the due date is looming and no other mechanism is active, either party can call the servicer to make a one-time payment over the phone. This is the most likely way to catch a due on sale... If someone other than the borrower is getting on the phone with the lender, the risk of a flag/notes on the account increases significantly.
Can't You Just Set Up Autopay?
No. For the first payment, autopay is not reliable. New automatic payment setups can take weeks to go live.
This has happened on my own home loan. I changed banks, set autopay a week before the due date, and then the payment was late, because their system couldn't pull automatically with less than 2 weeks notice. I called about the late fee and they forgave it once I explained the situation. But on a subto, you don't want any unnecessary attention.
Make the first payment deliberately, by a method you can confirm went through. Set autopay up for the payments after it.
Who Should Own This on the File?
Ownership of the first payment belongs to the buyer. Everyone's responsible, but someone has to be accountable.
This is a closing checklist item at Creative Title because it's trivial when someone is watching it, but expensive when nobody is. The seller thinks the buyer has it. The buyer assumes the title company handled it. The title company was never asked.
PRO TIP: Put it in writing. A contract term, an addendum, an email between parties. Just make sure it gets discussed and planned for.
The Takeaway
The gap between closing and live servicing is predictable, and it is the single easiest place to damage a seller's credit and your own deal for no reason at all.
Find it before escrow closes.
Handle it on the settlement statement if you can.
Make payment one manually.
Confirm it was received.
What happens if the loan does go sideways is covered in The Due-on-Sale Clause: What Actually Happens When a Lender Calls It.
Closing a subject-to? Book a call and we will walk the file before you commit to a structure. Or send your contract any time to [email protected].
This article is general information, not legal advice. Title insurance availability, underwriting standards and state law vary, and outcomes depend on the specific facts of a transaction. Consult a qualified attorney in the relevant state before acting. Creative Title is a licensed title and settlement services provider in Colorado and Tennessee.
Questions?
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