Finance Instruments - Loan Assumption

Question 1

What are the 2 ways some existing loans may be “taken over” by the buyer?

Answer 1

1) Assumption

2) Subject to an existing loan

Question 2

How is an existing loan “taken over” by a buyer by:

1) Assumption?
2) Subject to an existing loan?

Answer 2

1) Assumption - the buyer becomes personally and primarily liable for the entire debt. A separate Novation contract must be signed by the lender, seller, and buyer to release the seller from continuing liability for the loan.
2) Subject to an existing loan - Buyers acknowledge and promise to pay the existing loan, but are not personally liable. In the event of a buyer default, the original borrower is responsible. This may be of little comfort to the buyer if the loan is foreclosed and the buyers (after making years of payments) lose their home and any equity. The sellers usually believe they have rid themselves of the burden of monthly payments and aren’t too happy to learn of the long-forgotten obligation. Avoid this type of loan assumption.