Sunday, March 8, 2009

Perils Of Purchasing A Property Subject To The Current Mortgage

It is possible, though not common, to close a deal on a property by taking the place of the previous owner on the mortgage loan. There are however, some safety measures you need to take in order to avoid the perils that this kind of transactions implies. The assistance of an attorney is suggested on these deals due to the complexity of the resulting contract.

There are several issues to consider: Who is the proprietor of the house, who is obliged to repay the loan, what are the legal rights of the previous owner, what are the legal rights of the new owner and finally what are the legal rights of the bank or lending institution. As you can see, it is a complex matter because there are actually two separate contracts: The loan contract that obliges the lender and the taker and the property transfer contract which obliges the new owner and the previous one.

Purchases Without Cancellation Of The Outstanding Mortgage

A mortgage ties the property to the loan and not the proprietor. Though the borrower is legally obligated to repay the mortgage loan, the debt will follow the property regardless of who the owner is until it is fully paid off. This is an important fact because the consequences of this will have many implications on the outstanding relations between the owner, the debtor and the lender.

If there is a purchase without the cancellation of the outstanding mortgage, the debtor keeps owing the remaining of the mortgage balance to the lender and the property keeps being tied as collateral of the loan. The owner has then an asset affected as security of a loan taken by a third party.

Up to this point the situation is probably clear but you may wonder why on earth would someone want to do such a thing. The reason is quite simple: If someone no longer wishes to reside in a property but cannot sell it normally for a fair price and thus cancel the loan or if he cannot afford the payments of the mortgage loan any longer, it is possible to reach an agreement with a buyer who wants to purchase the house and that can take care of the payments to keep the lender from repossessing the property.

Contracts And Perils

Who runs the greater risk? This question is not simple to answer as it depends on how payments are handled. If the one paying the loan is the actual borrower (with the money handed by the new owner), the later one risks repossession of the property in the even that the payments are not made. If the new owner does not provide the money for making the payments or agrees to take care of the payments and does not make them, then the borrower who is the one that legally owes the money will be affected by the consequences of lack of payment on his credit score and history. If the lender takes the debt to legal grounds he may also have to answer with his assets if the money obtained from the sell of the property is not enough to cover the debt.

The only solution to avoid these problems is to get a couple of lawyers to outline a comprehensive contract with stipulations protecting both parties. And, on our humble opinion, it is preferable to obtain a new mortgage loan and cancel the previous one. There are plenty of lenders willing to provide financing if collateral is provided (even with bad credit).

About the Author

Devora Witts is a certified loan consultant who instructs people regarding Quick Unsecured Loans and Guaranteed Debt Consolidation. To get aid with your financial situation you can visit her at

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