The biggest controversy for a subject-to is the violation of the due on sale clause. This clause is a provision in the mortgage documents that says if the home is sold or transferred, the mortgage will be paid in full or the lender could call the loan due in full. This means that when the sellers deed the home to you, the lender can demand payment in full on the loan. However, most lenders will never know the seller transferred their title to you, as long as you make the payments on time. Most lenders are only concerned with receiving their regular loan payments in full and on time.
In my opinion, the best and most ethical way to handle a subject-to deal is to be completely honest. Let the lender know you did it. Send the lender a certified letter informing them of the ownership change. Keep proof of the letter and return receipt in your files. If the lender doesn’t respond (most won’t), then the law may hold that they have accepted the change by ignoring your letter. If they try to foreclose, then you may need to pay off the existing mortgage and refinance the property into your own name. If the property doesn’t have enough equity to justify refinancing into your own name, then it probably was not a worthwhile deal to begin with.
Excerpt from Investing in Real Estate with Lease Options and "Subject-to" Deals.
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