Introduction

In the Philippine real estate market, transferring a property that is still under a housing loan can be achieved through an assumption of mortgage. This process allows a buyer to take over the seller's existing mortgage obligations while simultaneously acquiring the property title. It is a common practice for properties financed through banks, government institutions like the Pag-IBIG Fund (Home Development Mutual Fund), or other lending entities. Assumption of mortgage offers advantages such as potentially lower interest rates from the original loan and avoidance of new loan origination fees, but it requires strict compliance with legal and institutional requirements to ensure validity and enforceability.

This article provides a comprehensive overview of the assumption of mortgage process in the Philippine context, including its legal foundations, procedural steps, required documentation, associated costs, tax implications, potential risks, and relevant considerations. It is grounded in Philippine laws such as the Civil Code, the Property Registration Decree (Presidential Decree No. 1529), Republic Act No. 6552 (Maceda Law), and specific guidelines from lending institutions. Note that while this serves as a general guide, consulting a lawyer, notary public, or the relevant lending institution is essential for case-specific advice, as procedures may vary slightly depending on the lender.

Legal Basis for Assumption of Mortgage

The assumption of mortgage is primarily governed by contract law under the Civil Code of the Philippines (Republic Act No. 386), particularly Articles 1291 to 1293, which deal with novation or the substitution of debtors. Novation occurs when the original borrower (seller) is released from the loan obligation, and the new borrower (buyer) assumes it with the creditor's (lender's) consent. Without the lender's explicit approval, the assumption is invalid, and the original borrower remains liable.

For housing loans, key statutes include:

Republic Act No. 9679 (Pag-IBIG Fund Law): Regulates loans from the Pag-IBIG Fund, which explicitly allows assumption of mortgage under certain conditions, such as for member-to-member transfers.
Republic Act No. 6552 (Realty Installment Buyer Protection Act or Maceda Law): Protects buyers in installment sales but applies indirectly to assumptions by ensuring refund rights if the assumption fails.
Presidential Decree No. 1529 (Property Registration Decree): Mandates the registration of the transfer of title with the Registry of Deeds to make it binding against third parties.
Banking Laws and Regulations: Private banks follow Bangko Sentral ng Pilipinas (BSP) Circulars, which require creditworthiness checks for assumers.

The process must also comply with anti-money laundering laws (Republic Act No. 9160, as amended) and data privacy regulations (Republic Act No. 10173).

Parties Involved

Several key parties participate in the assumption of mortgage:

Seller (Original Borrower/Mortgagor): The current property owner who wishes to transfer the loan and title. They must be in good standing with the loan (no defaults).
Buyer (Assumer/New Mortgagor): The individual or entity assuming the loan. They must meet the lender's eligibility criteria, such as credit score, income stability, and age requirements (e.g., Pag-IBIG requires active membership).
Lender (Mortgagee): The bank, Pag-IBIG, or financial institution holding the mortgage. Their approval is crucial, as they assess the buyer's ability to repay.
Registry of Deeds (RD): Government office responsible for registering the title transfer.
Bureau of Internal Revenue (BIR): Handles tax clearances and payments related to the transfer.
Local Government Unit (LGU): Issues real property tax clearances.
Notary Public and Lawyer: For drafting and notarizing documents like the Deed of Assumption and Deed of Absolute Sale.
Homeowners' Association (if applicable): For condominium or subdivision properties, requiring clearance for unpaid dues.

Eligibility and Requirements

Not all loans are assumable; it depends on the loan agreement. For Pag-IBIG loans, assumptions are allowed if the loan is at least two years old and the seller has paid at least 24 monthly amortizations. Private bank loans may have similar thresholds.

Requirements for the Seller:

Updated loan payments.
No pending legal issues on the property (e.g., lis pendens).
Clearance from the lender confirming the outstanding balance.

Requirements for the Buyer:

Financial capability: Proof of income (e.g., ITR, payslips), credit history, and debt-to-income ratio.
For Pag-IBIG: Active membership with sufficient contributions.
Age: Typically 21-65 years old.
No existing defaulted loans with the lender.

Property Requirements:

The property must be free from encumbrances other than the mortgage.
Compliance with zoning laws and building codes.
For foreclosed properties, assumption may not be feasible.

Step-by-Step Process

The assumption of mortgage involves coordinated steps between the parties, lender, and government offices. The process typically takes 1-3 months, depending on approvals.

Agreement Between Seller and Buyer:
- Negotiate terms, including the purchase price (equity payment to seller) and assumption of the remaining loan balance.
- Draft a Memorandum of Agreement (MOA) outlining the deal.
Application for Assumption with the Lender:
- Submit a joint application to the lender (e.g., Pag-IBIG branch or bank).
- Provide required documents (see below).
- The lender conducts a credit investigation on the buyer and appraises the property if needed.
- Upon approval, the lender issues a Letter of Guarantee or Approval Letter, releasing the seller from liability.
Execution of Legal Documents:
- Prepare and notarize the Deed of Absolute Sale with Assumption of Mortgage (DAS-AM). This document transfers ownership and the loan obligation.
- If separate, execute a Deed of Assumption of Mortgage.
Payment of Taxes and Fees:
- Compute and pay Capital Gains Tax (CGT) or Creditable Withholding Tax (CWT) to BIR (6% of selling price or zonal value, whichever is higher, for CGT).
- Pay Documentary Stamp Tax (DST) (1.5% of consideration).
- Secure BIR Certificate Authorizing Registration (CAR).
- Pay Transfer Tax to the LGU (0.5-0.75% of selling price).
- Obtain Real Property Tax Clearance from the Assessor's Office.
Title Transfer and Registration:
- Submit the DAS-AM, CAR, and other documents to the Registry of Deeds.
- Pay registration fees (approximately 1% of property value).
- The RD cancels the old title (Transfer Certificate of Title or TCT) and issues a new TCT in the buyer's name, annotated with the mortgage.
Release of Original Documents:
- The lender releases the original loan documents and mortgage annotation to the buyer upon full compliance.
Post-Transfer Obligations:
- The buyer begins making loan payments under the new terms (interest rates may be renegotiated).
- Update utilities, insurance, and homeowners' association records.

For Pag-IBIG-specific processes, the fund may require additional steps like membership transfer or loan restructuring.

Required Documents

A comprehensive list includes:

For Application: Valid IDs, marriage certificates (if applicable), proof of income, loan account statements.
Legal Documents: DAS-AM, MOA, Affidavit of Undertaking.
Tax-Related: BIR Forms 1706/1707 (for CGT/CWT), Tax Declaration, Official Receipt for taxes.
Property Documents: Original TCT, Tax Declaration, Real Property Tax Receipts, Homeowners' Clearance.
Lender-Specific: Pag-IBIG Membership Status Verification Slip, Bank Statements.

Costs and Fees

Costs vary by property value but typically include:

Assumption Fee: 1-2% of loan balance (charged by lender).
Appraisal Fee: PHP 3,000-5,000.
Notarial Fees: PHP 1,000-5,000.
Taxes: CGT (6%), DST (1.5%), Transfer Tax (0.5-0.75%).
Registration Fees: 1% of value.
Miscellaneous: Legal fees (PHP 10,000-50,000), processing fees.

Total costs can range from 5-10% of the property's value.

Tax Implications

Seller: Liable for CGT unless exempt (e.g., principal residence under certain conditions per Revenue Regulations No. 13-99). Income tax may apply if considered a business sale.
Buyer: No immediate income tax, but DST on the deed. Future sales may incur CGT.
VAT: Applicable if the seller is a real estate dealer (12% on gross selling price).
Withholding Tax: If the buyer is a corporation, 1-2% on the purchase.

Risks and Considerations

Lender Rejection: If the buyer is not creditworthy, the deal fails, potentially leading to breach of contract claims.
Hidden Liabilities: Unpaid taxes or encumbrances may transfer, so due diligence (title search) is critical.
Interest Rate Changes: The assumed loan retains original terms unless renegotiated, but rates could increase.
Default Risks: If the buyer defaults, the lender can foreclose, affecting both parties if novation is incomplete.
Legal Disputes: Family Code (Republic Act No. 9262) issues if the property is conjugal.
Economic Factors: Fluctuating property values or interest rates may make assumption less attractive than refinancing.
COVID-19 and Moratoriums: Past Bayanihan Acts provided loan moratoriums; check current regulations.

Buyers should consider title insurance, and sellers should ensure full release from liability via a Release of Mortgage document.

Alternatives to Assumption of Mortgage

If assumption is not viable:

Loan Payoff and New Mortgage: Seller pays off the loan, buyer applies for a new one.
Subject-To Mortgage: Buyer takes title without assuming the loan formally (risky, as seller remains liable).
Refinancing: Buyer refinances the loan in their name.
Installment Sale: Under Maceda Law, but without loan transfer.

Conclusion

Assumption of mortgage in the Philippines is a structured yet complex process that facilitates property transfers while preserving existing financing arrangements. It requires meticulous adherence to legal protocols to protect all parties' interests. Prospective buyers and sellers should engage professionals early to navigate institutional variations and ensure compliance. By understanding the full scope—from eligibility to post-transfer duties—participants can mitigate risks and achieve a smooth transaction. For updates, refer to official issuances from Pag-IBIG, BSP, BIR, and the Department of Human Settlements and Urban Development (DHSUD).