I receive frequent inquiries from bank clients who are concerned because their mortgage borrower has requested permission to transfer the collateral real property to another entity. These requests commonly are made for estate planning purposes (though other reasons are often cited) and may involve transferring the property to other entities such as a trust. The banker typically wants to know whether they have to agree to the transfer, what happens to the mortgage if they do, and what documents are needed as a result. Before we answer those questions, lets explain the difference between a transfer of property “subject to” a mortgage and the transfer of property in which the transferee “assumes” the mortgage. In the first case, the new owner acquires title to the property but does not expressly agree to pay the mortgage debt. If the original mortgagor defaults, the new owner can be foreclosed but will not be liable for any deficiency. In the second case, a new owner that “assumes” the mortgage expressly agrees to pay the mortgage debt and would be liable for any deficiency.
With that in mind, to answer the first question of whether or not the bank’s consent to the transfer is required, we look to the loan documents and, particularly, the mortgage. Most mortgages contain “due on sale” provisions which would make such a transfer an event of default unless the lender agreed to it. In those cases, borrowers will usually request that the bank consent. Whether the bank grants the consent or not is again, subject to the applicable loan documents and its own internal guidelines and procedures. If the lender does grant permission for the transfer, the best practice is to document that and also provide that the lender is not waiving its right to enforce the due on sale provision of the mortgage in the event of future transfers.
Assuming the bank agrees and provided that the new owner does not assume the mortgage, any such transfer is “subject to” the mortgage. The title to the real property passes to the new owner but the mortgage lien stays intact and with priority as of the day it was recorded. As mentioned above, the new owner must rely on the mortgagor to make the payments or he can be foreclosed. In the typical transfer for estate planning purposes, the new owner is related to or controlled by the original mortgagor and may therefore be comfortable with that risk.
Regarding the third issue, if the transfer is subject to the mortgage, the best practice is to document that the bank is agreeing to the transfer but waiving no future rights. If the structure calls for the new owner to assume the mortgage, the lender should require a mortgage assumption agreement containing the express promise by the new owner to pay the debt secured by the mortgage. Keep in mind that the Florida Department of Revenue considers a mortgage assumption to be subject to documentary stamp tax and the tax due will be calculated on the outstanding principal balance being assumed.