An Assumption Transaction is the transfer of responsibility for repaying a previously obtained loan.
A real estate buyer may “assume” a loan on the property already in existence between the lender and the seller.
After an agreement has been signed, the new buyer will take over payments and receive the property.
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In an assumption transaction, the buyer takes title to property by virtue of an “assumption deed” that typically contains both a vendor’s lien and general or special warranties.
The buyer then promises to pay the balance owed (“being assumed”).
This promise is sometimes secured by a deed of trust, which gives the seller the ability to foreclose without the need for court involvement if the buyer defaults.
How is this different from a “subject to” loan?
The two transactions are frequently confused.
In a “subject-to” loan, the buyer receives the property but expressly disclaims any obligation to pay the existing loan between the seller and the lender.
However, in Assumption Transaction, the buyer receives the property but expressly promises to pay the existing loan between the seller and lender.
So, in an Assumption Transaction, the buyer is contractually required to make payments on the original loan between the seller and the lender.
However, it is critical to remember, this contractual obligation runs between the buyer and seller only. Unless the lender contractually agreed to substitute the parties, the buyer is still liable to the lender for the balance of the loan.
Does the lender have to give the seller permission?
Remember that an Assumption Transaction takes place between the seller, who already took out the loan, and a real estate buyer.
An Assumption Transaction can be carried out without obtaining the lender’s permission.
There are some potential risks to carrying out the transaction without the lender’s permission; however, most Assumption Transactions are conducted without the lender’s consent.
This is because the new buyer is not making a promise to pay the balance of the loan to the lender; the buyer is making this promise to the seller.
Unless the lender releases the seller, the seller is still obligated directly to the lender to pay the loan; however, the buyer is obligated directly to the seller to pay the loan, so the seller simply makes the payments due under the loan.
Depending on the language under the original agreement between the lender and seller, an Assumption Transaction may (or may not) violate covenants running between the lender and the seller.
If such a covenant is violated, the lender could theoretically sue the seller for breach.
But why would they? If the buyer is making the seller’s original payments, the lender is typically satisfied and not interested in pursuing a remedy for the theoretical breach.
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Deed of Trust to Secure Assumption – form