FACTS:                    

A residence has been listed for 150 days with no offers.  The owner has a favorable interest rate – 3% – and the agent suggested that the seller offer alternative financing to make the property more attractive to potential buyers.  The agent is proposing that a buyer be allowed to assume the existing mortgage to take advantage of the favorable interest rate and pay the seller the remainder of the purchase price via cash. 

ISSUE:                      

Is it legal for a buyer to assume an existing mortgage? 

ANSWER:                

See Discussion.

DISCUSSION:         

Most promissory note documents are personal to the borrower and contain provisions prohibiting a buyer from assuming the payments.  Promissory notes also often contain due on sale clauses, providing that the entire balance is due and payable if the borrower sells or transfers title to the property.  Although technically not illegal, a transaction whereby a buyer assumes an existing mortgage without the lender’s knowledge or qualifying for the assumption, is high risk in that the entire balance may be called due after the close of escrow.  Independent counsel should be consulted before closing escrow on alternative financing transactions.