October 4, 2023


Mad about real estate

Buying Real Estate with a Subject 2 Contract

Subject 2 contracts offer buyers the opportunity to purchase real estate without obtaining bank financing. This strategy involves buyers assuming sellers mortgage debt by taking over loan payments.

Subject 2 financing can be a good option for buyers with bad credit and those unable to afford a large down payment. Using this option, sellers assign property rights to buyers once they take over payments. The mortgage note remains in the sellers name until buyers can qualify for bank financing.

When buyers refinance mortgages they are usually responsible for closing costs. These costs typically range between 4- and 7-percent of the purchase price. Common settlement fees include property appraisals, home inspections, loan origination fees, loan points, mortgage insurance, homeowners insurance, and legal fees.

Bad credit buyers pay higher interest rates than borrowers with good or excellent credit ratings. As long as the seller has good credit, buyers can take advantage of lower interest rates assessed on the original loan.

The primary goal of Subject 2 agreements is to provide buyers with the opportunity to buy a house with no money down. By entering into credit repair strategies, buyers can obtain a high credit score that allows them to refinance the Subject 2 loan within a few years and release the seller from the mortgage debt.

Both parties must conduct due diligence prior to entering into Subject 2. At minimum, sellers should obtain a current credit report, background check, and review buyers’ personal finances to ensure they can fulfill payment obligations. If buyers default on the mortgage installments, the seller is held responsible for delinquent payments or may run the risk of having the property fall into foreclosure.

Buyers engaged in Subject 2 normally remit home loan payments to the mortgage provider. However, some sellers have buyers remit payments directly to them and in turn, they remit installments to the lender. This scenario could easily place the buyer at risk for losing vested funds if the seller defaults on the loan.

It is best to retain a real estate attorney to draft and review Subject 2 contracts. Doing so minimizes risks for all parties involved. Subject 2 contracts are often used instead of bad credit lender loan mortgages to grant buyers time to restore FICO scores. Buyers should strive to refinance the loan into their name as soon as possible.

Subject 2 contracts are submitted to the courts to record transfer of property rights. These rights are “subject to” buyers fulfilling payment obligations. If buyers default on the contract, property rights revert back to the seller and buyers could potentially lose all funds invested.

Subject 2 agreements usually remain in place for 2 to 5 years. If buyers do not qualify for bank financing at the end of the contract, sellers can elect to extend contract terms or demand buyers obtain financing or face default consequences.

Buyers should carefully strategize financing options to ensure they can qualify for a mortgage loan within a few years. Otherwise, they could risk losing the property, along with all invested funds, by defaulting on the Subject 2 sale.