Market Wise Q&A: Is it Prudent to Tell the Bank we are Buying the House by Assuming the Mortgage

Pat Kapowich for the San Jose Mercury News Q: My sister and her husband were unable to continue to make payments on their house that is under-water. We decided to buy their home primarily to help them out while protecting their credit. We gave them $5,000 as a down payment in order for them to rent a property in the same school district. After we moved into my sister's home we drafted purchase documents, had them notarized and started making the mortgage payments they had in place.

We recently learned that buying a property and assuming the loan payments is not as simple as we thought. My husband is not the kind of person to handle financial surprises and is now completely stressed out. Don't the banks have enough bigger problems that they don't need to be concerned about a buyer assuming one of their mortgages?

A: No. Your husband has a right to be concerned. You need to handle this mess head on. Lenders started inserting due-on-sale clauses in the 1970s when interest rates were sky high. The federal Garn Act of 1982 gave the feds due-on-sale enforcement over state lines. Persons involved in these private transactions who have purposely circumvented this law have been prosecuted on a variety of charges.

No doubt there is a due-on-sale clause in your sister and brother-in-law's loan documents. The four of you need to sit down with a real estate attorney and make a plan to pursue this transaction correctly and openly. Bring every piece of paper associated with the sale/loan to this initial meeting.

If you and your husband can qualify to assume the loan currently in place the bank might authorize a legitimate sale. If so, you and your husband would need to provide a full loan application and be prepared to incur some charges. Conversely, if you don't qualify, then your sister and brother-in-law need to legally sell the house in a short-sale situation to another buyer. Either way, your husband's stress level will decline dramatically.


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