Questions arise on the MBE in which a person who owns property subject to a mortgage (the grantor), transfers that property to a buyer (the grantee). In such situations, it's important to consider whether the grantee has assumed the mortgage by purchasing the property, or, rather, has merely purchased the property subject to the mortgage. The general rule is that a grantee of mortgaged property takes the property subject to the mortgage. In such a case, the grantee is not personally liable on the loan; rather, the original mortgagor (the grantor) remains primarily and personally liable.
This default rule, however, will not apply if the grantee signs an assumption agreement. If the grantee signs an assumption agreement, he has assumed the mortgage. This distinction is important because once the grantee assumes the mortgage, he (the grantee) becomes primarily liable to the original lender (the person/bank/etc, who had lent money to the grantor), while the original mortgagor (the grantor) becomes secondarily liable as a surety. In addition, once the grantee has assumed the mortgage, any modification of the grantee's obligation to the lender discharges the original mortgagor (the grantor), and the grantor is no longer secondarily liable as a surety.
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is the assumption agreement subject to approval by the lender? what if the lender doesn't approve of the grantee becoming the primary?
ReplyDeleteNeal,
ReplyDeleteIt's a good question. On the MBE, look for "Due on Sale" clauses which allows the lender to demand full payment of the loan if the mortgagor transfers any interest in the property without the lender's consent. So, it's not so much that the assumption agreement itself is subject to the approval of the lender, but, rather, the transfer of property can be subject to lender's approval if the lender states as such in the original agreement b/w lender and mortgagor.