Typically, if a borrower has entered into a mortgage agreement with a lender, he is responsible for repayment of the note. However, in certain circumstances this obligation may be formally assumed by a third party, including an LLC. Although not identical to an assumption of debt, selling a property subject to an existing mortgage can be a valuable option for some borrowers, provided they are wary of the potential consequences.
Instructions
- 1
Check with the lender to see if the LLC can assume the mortgage note liability.
Lenders often make diligent credit assessments in extending a mortgage, and thus are reluctant to waive their right to pursue the original borrower. However, in certain circumstances and with tactful negotiations they can permit an assumption of debt, which has specific documentation and compliance requirements depending on the type of loan.
Execute a mortgage assumption agreement with the lender. To formally relieve the original borrower from liability, the lender must enter into an mortgage assumption agreement with the new borrower. Note that this may carry a mortgage assumption fee which is often a small percentage of the outstanding note that is due upon execution of the agreement.
3Transfer title to the LLC subject to the existing mortgage. Although not technically transferring the debt from the original borrower to the LLC, transferring title subject to the existing mortgage may be a viable solution depending on the circumstances. However, if the property owner / borrower executes a quitclaim deed to an LLC, it may trigger a so-called acceleration clause in the mortgage agreement, causing the entire balance of the note to become payable immediately. Thus, it is important to verify the status of the mortgage agreement prior to transferring title.
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