Assumptions, estoppel letters, and satisfaction
When a property with a mortgage is sold, the existing loan is usually paid off at closing. Sometimes, though, the buyer keeps the seller's loan in place. How that is done decides who is on the hook if the loan goes bad.
Taking title "subject to" the mortgage
When a buyer takes title subject to an existing mortgage, the buyer takes the property with the lien still on it but does not promise to pay the note.
- The seller stays personally liable on the note.
- The buyer makes the payments to keep the property, but is not personally liable for the debt.
- If the buyer stops paying, the lender can foreclose. The buyer loses the property and any equity in it, but the lender cannot pursue the buyer for a shortfall. It can pursue the seller.
Assuming the mortgage
When a buyer assumes a mortgage, the buyer agrees to take over the loan and becomes personally liable for it. Assumption normally needs the lender's approval, and the buyer has to qualify.
Assuming the loan does not automatically free the seller. Unless the lender expressly releases the seller, the seller can remain liable if the buyer defaults.
Novation
A novation replaces one party to a contract with a new one. All parties must agree, and the party being replaced is released. In a mortgage assumption, a novation substitutes the buyer for the seller as the borrower and releases the seller from liability.
| Subject to | Assumption | Assumption with novation | |
|---|---|---|---|
| Buyer personally liable? | No | Yes | Yes |
| Seller still liable? | Yes | Yes, unless released | No |
| Lender's consent? | Not part of the deal, but a due-on-sale clause may let the lender call the loan | Normally required | Required |
Remember the due-on-sale clause from Lesson 2: a transfer can let the lender demand the full balance, whichever way the buyer takes over.
Estoppel letters
Before a loan is paid off at closing, the closing agent needs the exact payoff figure. An estoppel letter gives it. Under Fla. Stat. 701.04(1)(a), the mortgagee or mortgage servicer must send an estoppel letter within 10 days after receiving a written request from the mortgagor, a record title owner, or someone lawfully acting for them. The letter must at least state the unpaid balance as of a date it specifies (701.04(1)(b)).
"Estoppel" is the legal idea that a party who states a fact others rely on can be stopped from later denying it. Once the lender states the payoff, the parties can close on that figure.
Satisfaction or release of the mortgage
Paying the note in full does not, by itself, clear the recorded lien from the public records. The lender has to give a document saying the mortgage is released, often called a satisfaction of mortgage, and it must be recorded.
Under Fla. Stat. 701.04(2)(a), within 60 days after the loan is fully paid, or paid under an estoppel letter, whichever is earlier, the mortgagee or servicer must:
- execute a written release of the mortgage,
- send it for recording in the official records of the county, and
- send the recorded release to the mortgagor or record title owner.
A prevailing party in a lawsuit to enforce this duty is entitled to reasonable attorney fees and costs.
Florida deadlines: estoppel letter in 10 days; release in 60 days.
Because Florida is a lien theory state, nothing is "deeded back" at payoff. The borrower already holds title; the recorded release simply removes the lien.