Very few mortgage loans are assumable and yet people still try to assume them either by breaking the rules outright or finding ways to go around them. To be able to understand more of assuming mortgage loans, I have prepared this discussion on the ways to assume mortgage loans and some ways people go around mortgage loan restrictions.
More often than not, it is the buyers of a property that is subject to the loan that are eager to assume the mortgage loan. Strictly speaking, assuming mortgage loan means that a person, usually the buyer of the property, takes it upon himself to pay the mortgage loan either with just the consent and agreement of the original mortgagor (usually the seller of the house) or with the consent of the both the mortgagor and the mortgagee( the lender).
There are basically three ways to assume a mortgage. The first way is for the buyer to buy the property subject of the mortgage. In this case, the buyer does not have to do get the consent of the mortgagee. It is still the seller that is responsible for the mortgage. However, the buyer of the property will get affected if the property is foreclosed. The second way to assume mortgage is for the buyer and seller-mortgagor to both pay the mortgage loan. The third way is through subjective notation, where, with the consent of the mortgagee, the buyer becomes the new mortgagor.
For the first method, there need not be any consent or knowledge from the mortgagee. What you have is an internal arrangement between the buyer and the seller where the mortgaged loan becomes part of the selling price of the property. For example, a house and lot valued at $200,000 is mortgaged for $80,000. The property can be sold at $200,000 and the seller will apportion the $80,000 as payment for the mortgage loan.
In the second method, the mortgagee is usually notified as he shall be accepting payment from both the buyer and the seller. A nominal fee for this assumption is usually asked by the mortgagee. For the third method to be possible, the mortgagee must give his consent to the assumption of the mortgage by the buyer. This means that the buyer will be the new mortgagor and the seller will be completely released from the mortgage. This third method is rarely ever approved by the mortgagor.
Method one and two are possible except if there is a ‘due on sale’ restriction otherwise known as a restriction clause. This clause is usually found on the document evidencing the loan or the mortgage. According to this clause, if any part of the property is sold or transferred without the mortgagee’s consent then all of the remaining mortgage debt will be due and demanded at once. To get around this some people just does not inform the lender of the assumption and hope he does not find out. Others execute an ‘agreement of sale’ or ‘bond of deed’ wherein the seller binds himself to sell the property to the buyer the moment the mortgage is paid.