financing secrets of a millionaire real estate investor.pdf

118 FINANCING SECRETS OF A MILLIONAIRE REAL ESTATE INVESTOR
The concept of an assumable mortgage has to do with the security
instrument (mortgage or deed of trust), not the note. Most security
instruments contain a “due on sale” or “acceleration” clause. The
due on sale clause allows the lender to call in the balance of the note
if the property is transferred. A security instrument without an acceleration
clause is referred to as an “assumable” loan. Thus, the expression
“assumable loan” is really a misleading designation; the issue is
not whether the note is assumable, it is whether the mortgage contains
a due-on-sale provision. FHA-insured mortgages originated before
December 1989 and VA-guaranteed mortgages originated before
August 1988 contain no due-on-sale provision.
Assumable with Qualification
A mortgage without a due-on-sale clause is known as a “freelyassumable”
loan because the buyer does not need any income or
credit qualification to take over the property. With some loans, a
lender may waive the due-on-sale option. The lender will usually do
so if the buyer submits a credit application to the existing lender.
These types of loans are known as “qualifying assumables.” Assuming
these loans generally require the same credit and qualification as a
new loan, but you avoid the fees associated with a new loan. In addition,
the loan may be amortized for a few years, which means you pay
less interest in the long run.
Buying Subject to the Existing Loan
If you take ownership to a property without paying off or formally
assuming the existing loan, you are taking title “subject to” the
existing loan. In most cases, the mortgage or deed of trust securing the
existing loan contains a due-on-sale restriction, allowing the lender to
call the balance owed immediately due and payable. If you intend to
own the property for only a short period of time, the due-on-sale issue
is, at least to you, wholly irrelevant. You will have sold the property