Print Article

Although not technically a form of owner financing, assumptions are frequently considered to be in the same category, probably because they can be accomplished by and between a buyer and seller without participation by the lender.  The essential features of an assumption are (1) the buyer takes title to the property by means of an “assumption deed,” containing either general or special warranties; and (2) the buyer obligates himself to the seller (but not to the lender) to pay the  balance of the indebtedness that is being assumed.  Note that the only way one becomes obligated to a lender is to sign a note to that lender.

Most all loans today are referred to as “non-assumable.”  This is meant to be contrasted with certain types of loans in years past that could be fully assumed merely by paying an assumption fee and notifying the lender of the new owner.

But is the term “non-assumable” really accurate?  No, it is not.  In understanding why, one must first understand that the concept of title (evidenced by a warranty deed) is separate from the concept of debt (evidenced by a note to a lender).  An owner of property is almost always entitled to transfer title to property whenever and to whomever he wishes.  However, doing so does not in itself relieve the seller’s legal responsibility to pay the note, nor does it automatically obligate the buyer to pay it. A deed transfers title - that’s all. 

The assumability issue comes into play in determining whether or not the lender will allow the substitution of one obligor on the note for another.  In other words, the question is: will the lender let the seller off the hook and replace him under the note with the borrower?  The answer nowdays is almost always no.  Lenders want the buyer to apply, qualify, pay fees, and get a new loan.

If an owner transfers title, has he committed an illegal act?  Has he breached the covenants of his deed of trust?  Again, the answer is no. Lenders, of course, would prefer to be notified if a loan is going to be assumed by a third party, but they have no absolute right to such notice. 

An assumption transaction is neither a breach of contract nor a “violation” of the due-on-sale clause.  If you look carefully at the typical lender’s residential deed of trust, you will see that it usually does not prohibit a transfer of property without the lender’s consent.  Instead, it states that if the borrower transfers title to the property without the lender’s permission then the lender may, if it so chooses, declare the loan due.  Look at paragraph 18 of the Fannie Mae/Freddie Mac Uniform Deed of Trust:

This is not prohibitory language. It says the lender may accelerate the note if it wants to. When an investor transfers the property without consent from the lender, the investor makes it possible for the lender, if the lender so chooses, to accelerate.  It is not a breach of the deed of trust.  It is not fraud.  As attorney Bill Bronchick puts it, “There is no due on sale jail.” 

How often does a lender declare an otherwise performing loan due?  Lenders may not like the fact that the property has been sold to someone else, but - so long as payments continue on a timely basis - the risk that a lender will take any serious action is small.  It is common, however, for the seller to receive a nasty letter from the lender making a threat about foreclosure if the new buyer does not apply and qualify; but it usually ends there, with no follow-up to the threat.

No. In a wrap, a new wraparound note from buyer to seller is created.  In other words, the buyer becomes obligated to the seller on a new wraparound note, which is secured by a wraparound deed of trust; and the seller remains obligated on the first-lien note (which is “wrapped”) until it is paid and released. These obligations coexist.

In an assumption, the buyer directly assumes the legal responsibility for paying the existing first-lien note. There is no new note. The transfer documents expressly state that the buyer is taking on the legal obligation of paying the first-lien note.  This is not the case in a wraparound transaction, where the first-lien note remains the exclusive responsibility of the seller.

Again, in an assumption, the buyer promises to pay the existing note.  In a “subject to” deal, the buyer takes title by means of a warranty deed but does not obligate himself to pay the note. He might, he might not. 

This is a typical assumption clause contained in a warranty deed:

See the difference?

Assumptions are usually appropriate for buyers who intend to stay in the property for a while. “Subject to” transactions, by contrast, are usually entered into by investors who want to quickly flip the property to a new buyer (perhaps doing some rehab work first) and making a profit - without incurring any responsibility for the note in the process.

Usually not. Title companies are conservative institutions that tend to avoid potential liability at any cost - so such assumptions will likely have to be closed in the office of an attorney familiar with “creative transactions.” If the buyer is curious about the status of title, then a title report (not the same as insurance) can always be obtained at modest cost.

It is not uncommon for a buyer to assume more than one note (e.g., a first and second lien).  The notes may even be to different lenders. The principle is the same.

There are two options here: the first includes security for the seller, i.e., the right to foreclose upon the buyer and take the property back if the buyer does not comply with the terms of the assumption.  In this case, necessary documents are a warranty deed with vendor’s lien and a deed of trust to secure assumption.

The second option applies where the seller does not require (or perhaps even care about) taking security for the assumption.  This might be true if the seller’s credit is already in poor shape.  The seller may just want to sign the property over to the buyer and (hopefully) never hear another word about it.  In this case, an assumption deed is sufficient to complete the transaction.

If the seller received a deed of trust to secure assumption at closing, then this enables the seller to foreclose if the buyer defaults. Texas is fortunate to have an expedited non-judicial foreclosure process.  Property Code Sec. 51.002 requires that a homeowner be given at least a 20 day notice of default and intent to accelerate the note if the default is not timely cured. See our other articles relating to the foreclosure process for details.

If the seller merely signed an assumption deed without a vendor’s lien and without a deed of trust to secure assumption, then the seller is out of luck.

Difficult times occasionally call for “creative” measures when it comes to real estate transfers.  An assumption can be an effective option under the right circumstances.

Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely.  The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences.  Consult your tax advisor as well.  This firm does not represent you unless and until it is retained and expressly retained in writing to do so.

Copyright © 2011 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, http://www.LoneStarLandLaw.com