Sale With Assumption of Mortgage: How Does It Really Work?
Pasalo (Assume Balance): What You Need to Know
One of the less common way to sell a property is through a Sale with Assumption of Mortgage. And because it is not the usual way of selling real estate, many people are not familiar with it. We even see people getting turned off by a property being offered for sale, just because it is still mortgaged to a bank or any other financing institution.
The usual and simplest way to sell real properties is through an “Absolute Sale”. This is what many people are familiar with. Some even assume that it’s the only way to sell properties. But that is not true.
An owner can validly sell his property even when it’s currently attached to a debt (loan). And in most cases, this is even advantageous to the buyer. It usually means lower prices and huge savings because owners who sell in situations like this, are usually in immediate need of money.
So… How does it work?
First, let’s understand what a mortgage is. A lot of people have been using this in the purchase of their property but too few actually understand what happened and who they are really indebted to.
It’s evident in buyers of properties from developers. A lot of them think that they are still indebted to the developer even after they have mortgaged the property to the bank to pay the developer.
So anyway, a mortgage is simply a debt with a “collateral” or “security”. This collateral is the real estate property. It is called “security” because in the event the debtor fails to pay his debt, the lender (creditor) will be able to take the property instead.
Here’s a more technical and complete definition of a mortgage from Investopedia:
" A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear. Mortgages are also known as “liens against property” or “claims on property.” If the borrower stops paying the mortgage, the bank can foreclose."
Because the property is an integral part of the debt agreement, people think that the property cannot be sold until the debt is paid up.
But actually, it can be. The buyer will just have to agree that he will assume the obligation to pay the remaining debt, to avoid complications later on.
In fact, the buyer is not even required by law to assume the mortgage. But the property is nevertheless subject to the mortgage agreement between the seller and his creditor. So, to ensure that the debt will be paid, it is practical and convenient for the buyer to just assume the mortgage. (See Articles 2126, 2129 and 2130 of the New Civil Code)
So, here is how a “Sale with Assumption of Mortgage” works:
The buyer pays the seller a certain amount for the property. The buyer now owns the property. But the sale also comes with the responsibility to repay the creditor (mortgagee) for the remaining debt of the seller.
It follows, of course, that the amount of the outstanding debt is considered in negotiating the price of the sale.
Let’s say the value of the property is PHP 10M and there’s still an outstanding mortgage debt of PHP 5M. The buyer may pay the seller only PHP 5M and assume the obligation to pay up the remaining debt of PHP 5M to the creditor. And it’s up to the buyer to negotiate with the seller for the actual purchase price.
The other important thing to mind
Despite the seller and the buyer being totally clear as to what’s going on, their consents alone may sometimes be not enough. If there is a stipulation in the mortgage contract that says the creditor’s permission is required before the property is sold and therefore, the mortgage debt transferred to another person, it has to be respected.
In the cases decided by the Supreme Court, it was held that the consent of the creditor (or more appropriately, mortgagee) must be given, for an assumption of mortgage to be valid.
Aside from complying with existing jurisprudence, this will also serve other practical purposes:
The creditor will know from whom it should collect payments for the debt, after the sale.
When the debt is all paid off, the creditor will know to whom the Title will be released.
In some cases, especially with banks, a new Title in the name of the buyer will have to be processed. So, they have to know about the sale and who the buyer is.
This may already be trivial to the person exposed to real estate transactions. But to the beginner, the first thought that comes to mind when a property is still mortgaged, is that they should not buy it.
Don’t be too quick. Opportunities are found in seemingly difficult situations. And in cases like this, contrary to what many people believe, mortgaged properties can actually be validly sold. There’s just an added layer of complexity. Actually, it’s just a couple of stipulations in the contract and an additional paper to sign that make all the difference!
But from that, you can take advantage of being in a better position to negotiate a better price for the property!