Assumable mortgage

People often ask, "Is the mortgage transferable if the property is sold?" when they should be inquiring, "Is the mortgage assumable? Can a subsequent buyer of the property take over the mortgage?" Since the lender holds the mortgage and the buyer will be assuming responsibility for the mortgage debt, the question involves assumability, not transferability.

Years ago most mortgages said nothing about being assumed by a new owner of the property. By being silent on the point, mortgages were fully assumable, and that's still the law today. Unless an existing mortgage specifically says something to the contrary, any buyer can assume it without qualifying for the loan, without even obtaining the lender's approval.

There are three different types of "assumable clauses":

• Fully Assumable: If there is nothing to the contrary in an existing mortgage, any buyer of a property can assume it automatically, without having to go through any approval or qualification process.
• Fully Non-Assumable: The mortgage contains a clause that makes the mortgage due and payable in full on any sale, transfer, or conveyance of the property. In short, no buyer of the property can assume the mortgage. Also known as a "due-on-sale" clause.
• Limited Assumability: Also known as "assumable with approval" or "due-on-sale at the lender's option," it's far and away the most common type of assumable clause today. When the property is sold, the lender can either: (a) allow the buyer to assume the mortgage with the lender's approval, or (b) require the borrower/seller to payoff the loan in full. For (a), the lender usually requires the same information as if the buyer was applying for a new mortgage, with the lender conducting a credit check.

If a mortgage is assumable with approval, see if the lender must act "reasonably" in deciding whether to grant its consent. Without it, a lender could arbitrarily refuse to allow a buyer to assume the mortgage, despite his or her financial qualifications.  By "calling" all mortgages on properties that were sold, lenders put the mortgage funds back on the street at a higher rate of return.

When a property is sold and the seller agrees to take back a mortgage in the offer, rarely does a clause appear limiting its assumability. Most VTB mortgages, therefore, are automatically and totally assumable by subsequent buyers of the property, without having to get the lender's consent.

Borrowers like fully assumable loans. When interest rates are high, a fully assumable mortgage at a below market interest rate can be promoted as a prominent selling feature of a house. If a fully assumable loan can't be arranged, try to get a limited assumability clause with a "reasonableness" requirement.

How are mortgages assumed? In most resale transactions, after being approved by the lender (if required), the buyer closes the deal, and that's it. By completing the transaction, registering the deed, and making future mortgage payments, the buyer has implicitly agreed to assume the mortgage.

New home transactions are treated differently. Here buyers are asked to sign a formal mortgage assumption agreement, making a direct contractual link between the buyer and the lender that otherwise would not exist. The agreement often takes the form of a mortgage assumption and amending agreement, where buyer and lender agree to vary some of the terms of the mortgage as registered on title. The need for such an agreement would exist if the buyer assumed a smaller principal than registered on title, if the payments or interest rate was changed, or if the payment dates were altered. Some lenders now use these assumption agreements in resale transactions too.

Never arrange a mortgage so that someone else can assume it. There is no guarantee any buyer of your property will want to assume the mortgage. The outstanding principal could be too small; it could be too large; a company or family loan might be available at a preferred rate of interest; or the purchaser may want to pay cash. In any of these cases, you'll be stuck paying a penalty for early termination of the mortgage.

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