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By Simon Volkov
Subject to is a realty contract used when buyers take over another person’s mortgage payments. This strategy can be a good option for credit-challenged buyers who do not qualify for bank financing due to insufficient credit scores or lack of down payment funds.
With Subject to contracts property rights are transferred to the buyer, but ‘subject to’ compliance of contract terms. Ownership rights revert back to the property owner if buyers default on contract terms. When default occurs the buyer forfeits all funds vested into the property.
These contracts can provide benefits to all parties involved as long as agreements are properly executed and recorded. It is recommended to obtain legal counsel to ensure contracts are legal and transfer of property is in accordance with state laws.
Subject-to can be a good alternative when borrowers cannot afford a down payment. Bad credit buyers find this type of contract appealing because it provides them time to engage in credit repair strategies to boost credit scores.
Once the contract is executed buyers take over loan payments, but the loan contract remains in the original homeowner’s name. Once buyers are capable of qualifying for a mortgage they refinance the loan into their own name.
Property owners should conduct due diligence to ensure buyers possess the financial means to pay future loan installments. Buyers should conduct due diligence to ensure property owners are current with loan payments and property taxes.
Buyers should also research public records to determine if liens or judgments are attached to the property which could interfere with transfer once they obtain bank financing.
Homeowners sometimes engage in Subject to agreements if they have been unsuccessful in locating a qualified buyer willing to pay their asking price. Others use this contract when they can no longer afford loan payments and attempting to avoid foreclosure.
If homeowners can locate a buyer who is willing to take over payments and cure mortgage arrears they can stop foreclosure from occurring and minimize impact to their credit.
Real estate investors sometimes engage in Subject to contracts to sell investment properties to credit-challenged buyers. Doing so can provide debt relief to investors through assignment of property rights and grant buyers the opportunity to buy real estate even when they cannot qualify for a bank loan.
Subject to agreements is a legally-binding contract that is enforceable in a court of law. Property owners are required to record the document through district courts in the county where the property is located.
Subject to agreements are normally in place for 1 to 3 years to provide buyers ample time to establish or restore sufficient credit scores. Buyers are required to obtain bank financing when the contract reaches maturity date.
Buyers are responsible for costs associated with obtaining a mortgage note. Expenses typically range between 4- and 6-percent of the purchase price. Fees include loan application, loan origination, loan points, property appraisals and inspections, mortgage insurance, legal review fees, and various closing costs.
Buyers should strive to obtain bank financing as quickly as possible. A credit score of 720 or higher is needed to obtain the lowest interest rate. Most banks require borrowers to possess a credit score of at least 640 before they will approve financing.
About the Author: Simon Volkov is a real estate investor who offers a comprehensive home buying article library via his website. Topics include
Subject to
, owner will carry financing, foreclosure prevention, real estate investing and much more at
SimonVolkov.com
.
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