The real estate industry is currently
facing a paradox: interest rates are lower than they have
been in decades, but money is tighter than ever before. In
other words, money is cheap, but you cannot get it. The only
exception seems to be single-family home loans, which are
plentiful and cheap.
This means that the best way to sell property is often for
the buyer to assume the existing loan. This idea, however,
is usually thwarted by the dreaded "due-on-sale"
clause. This is a provision in the note or mortgage allowing
the lender to call the loan if title to the property is transferred.
What can you do if you want to purchase or sell property
by using an assumption of an existing loan?
First, read your note and mortgage. If there's no "due-on-sale"
clause in the documents, the loan is freely assumable. Of
course, most mortgage loans do have "due-on-sale"
clauses, but a lot of older ones don't. This is generally
true of VA loans originated before March 1, 1988, and FHA
loans originated before December 1, 1986, both of which may
be assumed without qualifying. FHA loans dated after December
1, 1986, may be assumed only if the buyer qualifies. Do not
just ask your lender--read the document yourself. Lenders
will sometime say the loans are not assumable even when they
are. Remember, in the case of "due-on-sale" clauses,
silence is consent.
Some people think you can avoid a "due-on-sale"
clause by using an agreement of sale, or land sales contract,
so that a deed will not be recorded until the full purchase
price is paid years in the future. Unfortunately, this normally
will not work. It is just another way of transferring ownership
of real estate even if no deed is recorded, and the lender
can invoke the "due-on-sale" clause if it learns
of the transaction.
Sometimes you can avoid the "due-on-sale" clause
by selling the partnership or corporation that owns the property,
instead of the property itself. It depends on how the loan
documents are worded. However, proceeding in this manner could
have unforeseen tax consequences, so before doing it, you
should check with your attorney and tax advisor.
If the loan does contain a "due-on-sale" clause
and you cannot find a way around it, the next question is
whether the property securing the loan is residential with
less than five units, or some other type of property.
If the property is not residential (or if it is residential
with five or more units), this says that the lender can freely
enforce the "due-on-sale" clause. This means essentially
that apartment, commercial, and industrial lenders can call
their loans whenever the loan documents allow them to. Again,
read your loan documents. The only way to get an assumption
in this case is to request one from the lender, who is free
to say yes or no, or to impose any fees, interest rate increases,
or other conditions it may desire.
If the loan is secured by residential property with less than
five units, the rules are a little different.
Unfortunately, the general rule is still the same--the lender
can call the loan upon the sale of the property. However,
under federal law there are a few exceptions:
- A transfer to a relative resulting from the death of
- A transfer to a former spouse as part of a divorce settlement.
- A transfer to a spouse or child of the borrower.
- A transfer into an estate planning trust where the borrower
continues to occupy the property.
- The placing of a second mortgage on the property.
In most all cases, however, the lender can call the loan
upon sale if the loan documents allow it to.
If you want to do an assumption, check the loan documents
first. If they contain a "due-on-sale" clause, see
if an exception applies. If not, you must request permission
from your lender. And if you get it, get it in writing.
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