by Robert J. Bruss
Wouldn't it be nice to buy a home without having to qualify for a home mortgage? In many situations, you can take over an existing home loan without having to beg for the present lender's approval. Most fixed-rate home mortgages are non-assumable. That means they contain a due-on-sale clause that enables the lender to call the loan if the title to the home is transferred.
Most often, lenders learn there has been a property sale when they receive a new fire insurance policy. Or, if the mortgage payment includes property taxes, lenders see that the owner's name on the property tax bill doesn't match the name on the mortgage. Most lenders ignore these changes as long as the monthly mortgage payment is made on time.
If you find a home you want to buy and it has an attractive existing mortgage, say one at 7.5 percent fixed interest or below, there are at least six legal ways to avoid having the lender call that loan.
Check if there is a due-on-sale clause.
Surprisingly, many mortgages lack due-on-sale clauses. Older FHA and VA home loans, as well as many private-party mortgages, do not contain due-on-sale clauses.
Get a copy of the promissory note and mortgage or deed of trust to see if there is a due-on-sale clause. If not, you can buy the home subject to the mortgage. No lender can stop you from doing so.
If you phone the lender to inquire if there is a due-on-sale clause, you may be given wrong information. Lenders sometimes bluff inquirers, hoping for early loan payoffs. For your protection, ask the home seller or real estate agent to get you a copy of the promissory note and the mortgage or deed of trust so you or your attorney can determine if it contains a due-on-sale clause.
Even if you find a due-on-sale clause, it might not be enforceable. For example, FHA loans created after Dec. 1, 1986, have due-on-sale clauses, but many of these mortgages can be assumed with lender approval. VA mortgages issued before March 1, 1988, are assumable without lender approval.
Transfer to a surviving joint tenant.
The Garner-St. Germain Depository Institutions Regulation Act of 1982 bars a mortgage lender from enforcing a due-on-sale clause when title is transferred to a surviving joint tenant after a joint tenant has died.
This can be especially important when a surviving joint tenant widow receives title but lacks sufficient income to qualify for a mortgage assumption. As long as the surviving joint tenant makes the mortgage payments, the lender cannot call the loan.
Transfer to an owner-occupant relative by will.
When a homeowner dies and passes title by will to a close relative, such as a spouse or child, the lender cannot enforce a due-on-sale clause--if the heir occupies the residence.
Place a junior mortgage on the property.
Some mortgages stipulate that placing a junior mortgage, such as a home equity loan, on the property enables the lender to call the loan. This is called a due on encumbrance clause. However, Garner-St. Germain prohibits a lender from enforcing such a clause and calling the mortgage.
Transfer title into a trust that makes the owner the beneficiary.
A favorite technique for avoiding a due-on-sale clause is to ask the homeowner to transfer title into a trust that names the homeowner as the initial beneficiary. Title to the home is then held by the trust and a copy of the trust is sent to the mortgage lender who cannot enforce the due-on-sale clause when title is transferred to the trust.
Some home buyers then have the buyer named as the new trust beneficiary, but they "forget" to send a copy of the beneficiary change to the lender, thereby taking over the existing mortgage.
Divorce title transfers.
As part of a divorce, the mortgage lender cannot enforce a due-on-sale clause when title to an owner-occupied residence is transferred to a spouse or child. Even if the transferee cannot qualify to take over the mortgage, the lender cannot call the mortgage because of the title transfer.
Ask the lender for an assumption.
If your situation does not fall into any of these categories, ask the lender if you can assume the existing mortgage. This is particularly effective if the loan is currently in default. Many lenders have a policy of doing anything reasonable to avoid a foreclosure if the payments are brought current.
Before paying off an advantageous mortgage, try to bargain with the lender. Many lenders will threaten you, but rarely do they create a mortgage default by enforcing a due-on-sale clause. I also suggest consulting with an experienced real estate attorney to determine if a non-assumable mortgage actually can be assumed.
Robert Bruss is a Bay Area real estate broker and attorney. His column appears the second Friday of the month. Send questions to Bruss care of Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA 94302. On all tax-related matters, Bruss recommends that you consult your tax adviser for further details.
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