Can someone take over your mortgage payments?
Recently the Record-Eagle classifieds ran a “Real Estate Wanted” ad that read:
“HOUSE WANTED: TC or Leelanau Cnty. I’ll take over payments; priv. individual – good credit.”
So how does this work legally? Can you just transfer the mortgage? How about the note? What about the deed? What else must be accounted for in order to make this a legal transaction? Who should you consult to try and accomplish such a feat? And in today’s Traverse City real estate market, should a person who is afraid of not breaking even on a property sale consider something like this?
The short answer is that someone cannot simply take over your mortgage payments.
Most all mortgages, particularly recent ones, are not “assumable mortgages.” There are a couple of aspects of today’s mortgages which are designed to prevent just such an assumption of debt and responsibility from one party to another from occurring.
In times gone by, someone could assume the financial liabilities and responsibilities of the note attached as a lien (the mortgage) to the piece of property you were buying; they could shoulder the payments and in effect finish buying the property where you left off.
Today, most all mortgages have both “non-assumable” language in the mortgage, as well as “due-on-sale” clauses which prevent someone from taking over, or assuming, those responsibilities and liabilities. The “due-on-sale” clause essentially says that if there is a transfer of ownership, or sale, that the entire remaining balance on the note is due before the sale can be completed. Going back to our classified ad example, our “priv. individual – good credit” cannot take over payments from anyone who owes money on a piece of property, nor can the current mortgagor sell the property or transfer the deed without paying off whatever remains on the note first.
Without delving too far into lending logic. (an oxymoron kind of like “jumbo shrimp” or “military intelligence” — we’ll miss you George Carlin…) these two aspects of current mortgages attempt to retain the lending institutions’ ability to assess and control their own risk (and make some transaction income for going through the process each time). It also prevents the property under lien (the mortgaged collateral) from changing hands without the lenders’ explicit approval. That way the risk taker has the final say as to how much it will cost to hold the note for the buyer through the duration of the mortgage term.
This attempt to assign subjective financial values to
the risk involved with residential mortgages (particularly the riskier, “sub-prime” ones), and then to profit from selling those riskier loans to one another, is precisely what got the lending industry into so much trouble lately. (That, and a whopping dose of raw, unadulterated greed, but I digress.) Suffice it to say, there are not many assumable mortgages these days, nor will there be in the near future.
You can buy and sell real estate through a land contract or owner financing, where the seller of the property carries the note and holds the mortgage. The seller is effectively the bank, they assume the risk and collect the interest on the money owed. In addition, if the buyer defaults on the loan, the seller generally regains ownership of the property. There are limits on the allowable terms of land contracts, as well as to the amount of interest a private party is allowed to charge for financing the purchase. Again, however, only a seller who owns a property free and clear can offer owner financing in almost all cases.
So, in most cases an individual cannot take over the payments on a mortgage and alter the responsibilities of the note without the mortgage holders explicit consent and approval, which is denied through non-assumable and due-on-sale wording in the mortgages themselves. Deeds are not transferred with “clouded” ownership like outstanding mortgagees which would contradict the clear wording and intent of the Deed itself.
Anyone attempting to sell real property, which they own free and clear, to another party should consult a licensed Realtor (obviously?). TEAM MIKE has experience in these types of transactions, and coordinates and counsels the parties successfully. The parties can also hire attorneys to conduct the transaction, although this is by no means the most efficient or economical path, as you can well imagine.
Finally, if you’ve read this far you can probably figure out that anyone who is afraid of not breaking even on a property sale cannot consider someone else taking over their payments because they obviously owe money against at least one mortgage and are therefore prevented from shedding that risk through non-traditional means.
As always, please pose your questions or post your comments to TEAM MIKE below. If you prefer more private correspondence, don’t hesitate to email us at MikeGaines@C21Northland.com and Mike.Annelin@C21Northland.com .
Hope you all get the chance to enjoy the 4th Annual Traverse City Film Festival. It looks like it’s going to be another fantastic year for summertime film enthusiasts. We hope to see you there!