An assumable mortgage is a mortgage loan whose remaining balance can be transferred to or “assumed” by a purchaser of the property financed by the mortgage. In such cases, the purchaser becomes responsible for the remaining terms and balance of the mortgage. The act of assuming a mortgage contract is called “mortgage assumption.”
For instance, suppose a person takes out a mortgage loan of $200,000. Then, a new buyer comes along and wishes to purchase the house without applying for an entirely new mortgage loan. They might be given the option to purchase the house for a selling price and assume the $200,000 mortgage, or the remainder of it, and thus become liable for the mortgage debt.
Generally speaking, most mortgages can be subject to assumption. Depending on the type of property, some mortgage assumption arrangements require that the assuming party is a qualified lender or other such professional party.
Assumable mortgages can be beneficial both for the original mortgage holder and the assuming party. However, assumable mortgages are often associated with two distinct legal issues. These are:
- Consent of the lender: In most cases, the assuming party needs to obtain consent from the mortgage lender prior to beginning the assumption process. Failure to do so can create legal problems between the original lender and the assuming party.
- Release of liability for the seller: The selling party (i.e., the original mortgage holder), may need to make a formal agreement stating that they are being released from the terms of the mortgage. If the seller fails to obtain such a release in writing, they might remain liable on the loan even after the assumption has occurred. That is, if the new owner defaults, there is a chance that the seller can still be held liable. To avoid this, they should obtain a liability release in writing.
These types of legal issues may lead to more serious conflicts that require a legal filing. In such cases, the court may issue a damages award or other remedies, such as a re-writing of contract terms.
A due-on-sale clause is a clause in a loan contract that states that the full amount of the contract is owed in the event of a sale or transfer of the property. This means that the borrower needs to pay back the full amount remaining on the loan in order to transfer the property. These types of clauses can have the effect of preventing an assumption of a mortgage loan. Thus, due-on-sale clauses often favor the lender and place limitations on the borrower. Borrowers should examine mortgage contracts for due-on-sale clauses, especially if they wish to set up a mortgage assumption later on.
Assumable mortgages can often present alternative options for persons interested in a real estate transaction. However, they can often be complex, and may require the assistance of lawyer. You may wish to hire a real estate lawyer in your area if you need assistance negotiating or dealing with an assumable mortgage. Your attorney can provide you with legal advice and research pertaining to your claim. Also, if you need to file a lawsuit, your lawyer can provide you with representation during court meetings.