Assuming a Loan: Title and Mortgage

When a loan is assumed no one is added to the mortgage or security instrument. There is often confusion about the difference in owing money on a property and owning a property. Owing and owning while closely related are not the same thing. In the case of an assumption the lender gives permission for the owner that originally took out the loan to sell some or all of their interest in the property without paying off the loan. In most cases a loan being assumed has a “due-on-sale” clause that prohibits the owner from transferring a beneficial interest in the property (selling) without the lender’s permission. In a qualifying assumption the lender is giving permission for a sale or transfer of beneficial interest without requiring the loan to be paid off.

The assumption occurs when the individual purchases the property and the underlying loan secured by the property is not paid off. The security for the loan already exists, the property. The new owner does not have to promise to pay back the loan (sign a note or mortgage). If the payments are not made the lender’s lien on the property is superior to the new owner’s interest and the lender can foreclose and extinguish the new owner’s interest. So while the new owner has not promised to pay back the loan secured by the property, if that loan is not paid the new owner will lose the property through foreclosure of the preexisting lien on the property.

So it is not the assumption of a loan that puts an individual in title on a property, it is a transfer of ownership, typically by a deed in this case, that transfers ownership or ‘puts them on the title.’ The assumption occurs when the lender allows this transfer or sale without paying off the underlying loan. The new owner has purchased the property knowing that there is a lien on the property that if not paid will prevent their continued ownership.

While the lender does not require the new owner to promise to pay the loan back since they already have a lien on the property to secure their loan, it is a good idea for a seller to get a promise from the new owner to pay the loan that is in the seller’s name. The assumption of the loan does not automatically release the seller from liability even though the lender gives permission for the assumption. This promise to pay the underlying loan is called a mortgage or deed of trust to secure the assumption. If the new owner stops making payments (defaults on the agreement that secures the assumption) the seller may bring the loan (that is still in their name) current and foreclose on the new owner’s interest in the property.

The above is just general information and may not be exact in all situations or all states. For information on the law in your particular locality consult with a competent real estate attorney.