Subject 2 Contract: Understanding the Ins and Outs
A “Subject 2” contract is a term used in real estate transactions to describe a type of transaction that allows a homebuyer to take ownership of a property while assuming the existing mortgage from the seller. In essence, subject 2 means that the sale of a property is subject to an existing mortgage. The buyer takes over the mortgage payments and assumes responsibility for paying the remaining balance.
In Subject 2 contracts, the seller transfers ownership of the property to the buyer, but the existing mortgage remains in place. The buyer is responsible for making mortgage payments directly to the lender. This type of arrangement can be beneficial for both parties. The seller can transfer ownership of the property without having to pay off the mortgage, and the buyer can take ownership of the property without having to apply for a new mortgage.
However, it’s important to note that subject 2 transactions can be risky for both buyers and sellers. If the buyer defaults on the mortgage payments, the lender can foreclose on the property. The seller may also be liable for any remaining balance on the mortgage if the buyer defaults.
Sellers should also be aware that subject 2 contracts may violate the terms of their mortgage agreement. Most mortgage agreements have a “due on sale” clause, which requires the full balance of the mortgage to be paid off if the property is sold. If the seller violates this clause by transferring ownership of the property without paying off the mortgage, the lender may accelerate the loan and demand immediate repayment of the full balance. This could potentially lead to foreclosure.
Buyers should also be cautious when entering into a subject 2 contract. They should thoroughly review the terms of the existing mortgage to ensure that it is a viable option for them to take over the payments. Buyers should also obtain a title report to ensure that there are no liens or other encumbrances on the property that could affect their ownership.
In conclusion, subject 2 contracts can be a viable option for both buyers and sellers in a real estate transaction. However, it’s important to fully understand the risks and potential pitfalls associated with this type of arrangement. Buyers and sellers should consult with a real estate attorney or financial advisor to ensure that subject 2 is the right decision for them.