Q: Much has been written about creative financing, but apparently one important factor is to determine whether one's mortgage is assumable. How can we learn whether our mortgage can be assumed? What is meant by "purchase subject to existing mortgage" and is this different from an assumption? If our mortgage is assumed, are we still responsible in any way?
A: This is a most difficult and complex area of real estate law.
If I own a house on which there is a mortgage, I can sell it to you under many different kinds of arrangements. You can pay all cash for the house, and part of your cash will be used to pay off my mortgage. If you obtain a new mortgage (deed of trust), I will still get all cash for my house and again, part of the proceeds will be used to pay off my mortgage.
But you may decide to buy my house, assume my mortgage and pay the difference in cash. For example, I sell my house for $125,000, and there is an existing mortgage of $80,000. You assume (take over) my mortgage obligation and pay me the balance of $45,000 in cash. If I am so inclined, I may "take back" a second mortgage for all or part of that balance.
But the assumption process is not automatic. Since the early 1970s, most commercial lenders have included a "due-on-sale" clause in the standard deed of trust, which, in effect, means that if you sell your propety, the entire mortgage may be immediately due and payable.
While several courts in this country have determined that these due-on-sale clauses are unenforceable because they go against public policy, it is not yet possible to give a definitive answer on the validity of those clauses in the Washington metropolitan area. Thus, the first step is to assure yourself that your mortgage can, in fact, be assumed.
The general rule is that in the absence of a nonassumable clause in your deed of trust, the mortgage can be freely assumed. You should check with your lender, and most commercial lenders will be cooperative in telling you whether a new buyer can assume your mortgage.
Another part of your question concerns the relationship between you, the original borrower, and your lender. The fact that your lender will permit the assumption does not necessarily relieve you of your responsibility to the lender. After all, you borrowed the money from the lender, your credit references were checked and the money was lent on the strength of your financial background.
If the lender permits an assumption, it will probably insist that you remain personally liable, in the event the buyer (the new borrower) defaults. How do you protect yourself?
First, send the lender a letter informing them of the transfer, and give them your new mailing address. Ask the lender to inform you in writing in the event the new buyer defaults.This way, you can take appropriate steps to stop any threatened foreclosure proceedings.
Second, it is advisable to try to get a complete release from your mortgage lender. Many lenders may be willing to release you, depending, of course, on the circumstances of the transaction.
Turning to the relationship between you and the new buyer, there is a basic distinction between an assumption and "taking subject to." If your purchaser merely takes the property "subject to the mortgage," your purchaser is not personally responsible or liable for making the mortgage payments.
While in reality your purchasers will certainly continue to make the payments if they want to stay in the house, the fact remains that if they decide to move out, there would be no personal liability attached to them under a "subject to" arrangement.
One the other hand, if the new purchaser actually assumes the deed of trust, he or she legally is obligated to continue to make the payments. In the unlikely event of foreclosure, the new borrower would be responsible for any deficiency if the foreclosure does not bring sufficient funds to cover the mortgage.