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When Can an Existing Mortgage Be Assumed?

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.

Non-Residential Properties
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.

Residential Properties
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:

  1. A transfer to a relative resulting from the death of a borrower.
  2. A transfer to a former spouse as part of a divorce settlement.
  3. A transfer to a spouse or child of the borrower.
  4. A transfer into an estate planning trust where the borrower continues to occupy the property.
  5. 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.

Conclusion
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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