Assuming a Mortgage...RE Agent says can't be done

[Daniel Miller]

I am trying to purchase a fourplex.

My parents (due to my lack of credit history) have stated that they will assume the existing mortgage. I talked this over with my RE Agent and he said banks will probably not let me (parents) assume the mortgage and they will call the "Due on Sale Clause".

The mortgage was made in 2003. The residential interest rate at the time was right around 6.5%. I do not see why the bank would not let my parents assume the mortgage. My parents, specifically my Daddy, has a credit score over 800. Also, we COULD conceivably get a new, conventional mortgage at around 5%. I deduce that the banks would have a vested interest in keeping the mortgage, since the interest rate is considerably higher, than what they are currently making loans for. Is my reasoning off? Do banks typically not let qualified persons assume mortgages in this economic climate? I think my RE Agent might be wrong, but I would definitely like some advice. I am confused.

Thanks!

[Dion DePaoli]

There are two types of loans which carry an assumption clause, those are FHA loans and VA loans. All "formal" assumptions are subject to the Mortgagee approval of the new borrower. Usually a 1.0% fee and standard underwriting will take place.

Loans that do not carry an assumption clause tend to have an Alienation Clause or a Due on Sale Clause. Those in general say any transfer in interest either whole or in part can give the Mortgagee the option to call the note due through an Acceleration Clause.

Those clauses, DOS and AC, were found legal and obtained congressional backing through The Garn–St. Germain Depository Institutions Act of 1982. Banks at the time where having difficulty with folks conducting Subject To sales where the new Buyer/Borrower was not approved and could carry more risk of default or delinquency since they were not approved formally by an underwriter. The Buyer/Borrower was fond of the assumption as it also meant lower interest rates than the current market rate, as in the late 1970's and early 1980's rates were on the rise.

If the loan that you are talking about is not assumable, which means there is no assumption clause in the loan documents, then it is not assumable. You can proceed to do an unapproved ("formally") Subject To purchase but the old borrower will be liable for the debt and the Mortgage "could" trigger acceleration and call the entire note due. They also "could" do nothing. There is really no way to predict.

Many folks want to reduce whether the idea of a bank pursuing their remedies related to a DOS as a function of interest payments in the market. While that is certainly a point it is not the only point nor the most important. A borrower has a contractual relationship with the Mortgagee through the security instrument (DOT/Mortgage). Within that contract are terms of agreement which deal with taking care of the property, protecting the interest of the Mortgagee by paying for taxes and insurance and some others. A new party that is not formally approved and then modified into the existing obligation has no contractual obligation to the Mortgagee. This adds a 3rd party to a situation that may require the original two first parties to interact. The Subject To buyer is not recognized as an owner by the Mortgagee nor does the new Buyer receive clear and marketable title to the real property since it is encumber by the mortgage itself. So the waters get muddy, the intent of the new Buyer/Occupant can be malicious and other influences can also weigh in.

With the lack of an Assumption Clause, you can still attempt to put a Subject To deal together. It would be recommended that you put the Mortgagee on notice through some communication, written likely the best manner. Just be aware the Mortgagee may not respond, which lack of response is not an approval. They may in the future come forward and simply decide to exercise their right of Acceleration for Alienation. There is no limitation in time for when a mortgage can enforce the clauses. It is not illegal nor it is it immoral to put the ST together however, you do need to be prepared to handle the Acceleration if it occurs. A Mortgagee enforcing those remedies would still have to follow foreclosure process for the local of the subject property.

The Mortgagee can foreclose regardless of delinquency or default of payment. The Alienation clause removes the condition of default as a trigger to call the entire note due. As such, if the Mortgagee forecloses you could lose every dollar you put into the property in payments or repairs or equity. The transaction structure may also make it difficult to pursue the Seller for any type of civil suit for failure to communicate Lis Pendis or alike on the property if you do not receive service process or to attempt to recoup money you invested. In simple terms, an unapproved assumption by the Mortgagee can mean you lose all of your money with no recourse on anyone to recover it.

All that or you can simply go try and get a home loan with your parents as co-borrowers or non-occupying borrowers which is frankly not that uncommon. As you mention, the rate will be lower than the current rate of the existing mortgage. This also means the loan is your, you get free and clear title, etc, etc. As a first time transaction for you, to me, this should be the path you pursue. Jumping into Subject To with a limited knowledge of real estate could be trouble for you that you don't need or want.

One last thing. It is not clear what the barrier to this is in your post however, an Assumption can cost a similar amount of money as a new loan depending on how it is structured. A closing still takes place which will have various costs such as insurance, deed recording, title insurance (if you find a title company willing to insure) and any type of profit the Seller wants to make. So from a capital deployment standpoint, you may not be saving all that much.