Using Subject 2 Contracts to Buy Real Estate With Less Than Perfect Credit

Subject 2 is a way to buy real estate without applying for a home mortgage loan. This financing option requires buyers to assume mortgage debt from the property owner. Real estate investors often use Sub2 contracts when selling houses to buyers with less than perfect credit.

Subject 2 is a great option for buyers unable to qualify for a conventional home loan. The property owner transfers the real estate deed to the buyer who becomes responsible for paying remaining loan installments. Loan documents remain in the original mortgagor’s name and the new buyer piggyback’s off their good credit.  

Instead of entering into a high interest bad credit loan, buyers can take advantage of assuming low interest payments. Buyers should engage in credit repair strategies so they can obtain financing within a year or two.

The primary purpose of entering into a Subject To contract is to let buyers buy a house without a down payment or credit check with the intention of refinancing the loan into their own name as soon as their credit allows them to obtain financing through traditional means.

Entering into Sub2 contracts requires both parties to engage in due diligence. Sellers should obtain financial records to ensure the buyer is financially capable of paying home loan installments. When buyers default on the note, the note holder is responsible for missed payments or runs the risk of losing the property to foreclosure.

Most Subject 2 contracts require buyers to submit loan payments to the servicing lender. However, some sellers require buyers to submit payments directly to them and they will submit payments to the loan provider. In this scenario, buyers run the risk of losing vested funds should the seller default on the mortgage loan.

Subject 2 contracts should be drafted by a real estate attorney to minimize risks for both parties. Sub2 contracts are used in place of bad credit lender loan mortgages to give buyers time to restore their credit rating. Buyers should refinance into a conventional home loan to purchase property rights as quickly as possible.  

In order to be legally binding, Sub2 contracts must be recorded through the court. Subject 2 records the transfer of property rights to the buyer. However, property rights are “subject to” the buyer adhering to contract obligations. If buyers default on their agreement, ownership rights revert back to the seller and the buyer loses all funds invested into the property purchase.

Sellers determine the duration of Subject 2 contracts which typically extend for 2 to 5 years. At the end of the contract, buyers must apply for a home loan or obtain financing through another source such as hard money lender loans.

Hard money loans consist of high-interest loans provided by private real estate investors or investment groups. This is a risky and expensive option for borrowers with bad credit. Therefore, buyers who enter into Subject To contracts should carefully strategize the ability to obtain financing in the future. If buyers cannot obtain financing at the end of the Subject 2 contract they could end up being in default and run the risk of having property rights transferred back to the seller.

When mortgage notes are refinanced the buyer is responsible for costs typically associated with entering into a home loan. Common costs include loan points, home inspections, property appraisals, mortgage insurance, homeowner’s insurance, realtor commissions, legal fees, and closing costs.

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