A payment takeover contract refers to an agreement where a buyer purchases an asset by taking over the loan payments from the current owner. This may involve the payment of a lump sum in addition to the takeover agreement.

Obligations and Restrictions of the Original Contract

Before agreeing to a payment takeover contract, all parties should understand the obligations and restrictions of the original contract (and lending party) as well as its effects on secondary transactions. Since the buyer agrees to take over the loan payments of the seller, it means the assets were purchased through financing.

Review All Existing Contracts

The financing may have been provided by the asset's original seller or by a third-party lender, which is usually the case with car loans and mortgages. It is imperative that entities intending to enter into a payment takeover contract review and understand all existing contracts relating to the purchase/financing of the asset they are taking over.

Resale Restrictions

Although it is rare for resale restrictions to be placed on assets, they occasionally crop up. For instance, there are restrictions, covenants, and codes on specific real estate properties which limit buyers from reselling the property within a specified time period.

Unlike the sale of an asset, loans are usually not transferable to other parties. Loan agreements usually require the original borrower to completely pay off the loan. If another entity wants to buy the asset, they must get their own financing or pay cash.

Ensure That Ownership and Financing Is Transferable

Whether there are restrictions on the sales agreement or financing agreement, buyers should determine whether the title or ownership of the asset they want to purchase is transferable.

It's acceptable if the asset and financing are transferable and the prospective buyer wants to acquire the asset by taking over pending loan payments. This means the lender recognizes the buyer as being responsible for paying off the loan.

However, if the financing is not transferable, the original owner remains responsible for the remaining payments. In this instance, the payment takeover deal becomes an indirect transaction where the new buyer sends the loan payments to the original buyer and relies on the said buyer to pay off the lender.

This is risky for the new buyer unless some form of security mechanism is added to the contract holding the original buyer liable for defaults in payments.

Liens

In cases where the sale of assets is made via a payment takeover, the lender holds a lien against the property. The lien gives the lender the authority to sue the borrower for non-performance of the loan or repossess the asset in the event of a default.

Individuals should not take over loan payments on assets where the lender holds a lien except the contract recognizes their ownership of the property. If not, they could be sending money to the original buyer without said buyer paying off the lender as agreed.

Acquisition of Liabilities

Once you take over a mortgage, all liabilities, including interest rates and monthly payments become your responsibility. However, it's possible to save some money if the interest rate on the newer loan is lower than that on the existing loan.

However, you should be aware that lenders can change the terms and conditions of the loan (including interest rates).

Foreclosure

The lender can foreclose if you do not make timely payments on the mortgage. If the property sells for a lower price than the value of the mortgage balance, you could be sued for the difference.

Acquiring a mortgaged property using a payment takeover contract isn't easy. You need to go through the pre-qualification process and pay the closing fee before getting one. You should also factor in the cost of appraisal and title insurance.

Imagine the following example:

  • You wanted to purchase a house for $100,000.
  • The property's take over mortgage is valued at $95,000 with a 7 percent interest rate.
  • All you need to do is make a down payment of $5,000 and the property is yours.

In most cases, you need to make up the difference between the asking price and the balance of the takeover mortgage.

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