Q: I inherited some money last year. Recently, I started looking for a small home or condominium to purchase when I found a guy who was willing to sell me his condo. I gave him $ 22,000 in cash and he gave me a grant deed. The deal was that I would take over the mortgage payments. Last week, I had a concern regarding a tax bill the bank should have been paying. I called and got transferred around to several people at the mortgage company until one of them finally told me I didn’t own the house and they were going to start foreclosure proceedings. I don’t understand what is happening.
A: I don’t know if I can help, but I can tell you exactly what happened.
The type of transaction you are describing used to be called a “wrap.” In other words, the buyer would pay the seller for his equity in the home and would simply continue to make mortgage payments. Until the mid-1980s the lender didn’t care who was making the payments. As long as the account was kept current, all was well.
The laws were changed about 40 years ago to allow lenders to put a clause in the mortgage that allowed the lender to call the note due and payable upon a transfer of the property. Known as an acceleration clause, it required a buyer to formally assume or pay off the existing mortgage.
Then the Great Recession hit about 15 years ago and lenders went back to not caring so long as the payments were made. Then we came out of the recession about eight years ago and all of a sudden the banks went back to caring, as they still do today.
Wraps are still done to a small degree, but the only way they work is if no one publicly records the deed.
Most, if not all, commercial lenders run routine computer checks of the public records for each of the properties on which they have a mortgage. If the property records indicate title to the property has changed, the lender will begin the acceleration process. If the note is not immediately paid off, the lender can foreclose.
When you called the mortgage company and represented to them that you were the owner of the property, you tipped them off to the transfer.
You have not told me whether or not the deed was recorded. If the deed was on record, the mortgage company undoubtedly put you on hold while they ran a quick records check. When they discovered the change in ownership, they announced their intent to foreclose.
You have to do something to protect your equity in the property.
If the bank is allowed to foreclose, there is a very good chance you could find yourself out of the house with nothing in your pocket.
If you are able, you need to quickly refinance to pay off the mortgage holder. Any conventional type of financing will work. Check with your local bank or get a referral to a lender.
If you are unable to refinance, try to talk to the existing lender and see if they will let you formally assume the loan.
Failing those things, your last course of action should be to try to sell the property. If you can sell the condo, you would be able to save your equity.
A word to the wise: This is what happens when you try to participate in a complicated real estate transaction without the advice of a professional. A Realtor could have prevented this problem before it ever started.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like answered in this column, you can send an email to [email protected].