Assumption of mortgage
Encyclopedia
Assumption of mortgage is the purchase of mortgaged property
whereby the buyer accepts liability
for an existing debt
secured by a mortgage on the property. This generally requires the consent of the lender that owns or services the existing loan. The seller remains liable to the existing mortgage
lender (whether the lender is a commercial bank
, thrift
, credit union
, mortgage banker, or private lender) unless the lender agrees to release the seller from further liability.
For example, a homeowner owes a 30-year mortgage loan
of $250,000 against his house. A prospective buyer wants to purchase the house for $300,000 and keep the same mortgage in order to avoid going through the process and expense of applying for a new loan. The buyer pays $50,000 cash for the equity and assumes the $250,000 mortgage, becoming liable for the debt. However, the original owner remains liable as well unless and until the lender releases the original borrower.
A transfer of property with an existing mortgage loan that is made without the lender's consent is sometimes referred to as a sale "subject to" the existing loan. This type of transfer does not avoid the lender's right to call the loan due under the due-on-sale provision in the loan. It also does not relieve the seller of liability on the existing loan.
In the United States, most mortgages in recent years restrict assumptions of existing mortgage loans when the mortgaged property is sold by including a due-on-sale clause
. This type of provision permits the lender to require payment of the full loan balance if the property is transferred to a new owner without the lender's consent.
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
whereby the buyer accepts liability
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...
for an existing debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
secured by a mortgage on the property. This generally requires the consent of the lender that owns or services the existing loan. The seller remains liable to the existing mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
lender (whether the lender is a commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
, thrift
Thrift
Thrift may refer to:* A savings and loan association in the United States* Restrained or disciplined spending habits* Apache Thrift a remote procedure call framework developed at Facebook for "scalable cross-language services development"....
, credit union
Credit union
A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
, mortgage banker, or private lender) unless the lender agrees to release the seller from further liability.
For example, a homeowner owes a 30-year mortgage loan
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
of $250,000 against his house. A prospective buyer wants to purchase the house for $300,000 and keep the same mortgage in order to avoid going through the process and expense of applying for a new loan. The buyer pays $50,000 cash for the equity and assumes the $250,000 mortgage, becoming liable for the debt. However, the original owner remains liable as well unless and until the lender releases the original borrower.
A transfer of property with an existing mortgage loan that is made without the lender's consent is sometimes referred to as a sale "subject to" the existing loan. This type of transfer does not avoid the lender's right to call the loan due under the due-on-sale provision in the loan. It also does not relieve the seller of liability on the existing loan.
In the United States, most mortgages in recent years restrict assumptions of existing mortgage loans when the mortgaged property is sold by including a due-on-sale clause
Due-on-sale clause
A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance may be called due upon sale or transfer of ownership of the property used to secure the note...
. This type of provision permits the lender to require payment of the full loan balance if the property is transferred to a new owner without the lender's consent.