Selling a property currently under mortgage with the Home Development Mutual Fund (HDMF), commonly known as Pag-IBIG Fund, is a frequent transaction in the Philippine real estate market. However, because the property serves as collateral for a public loan, the process is governed by specific legal frameworks and administrative guidelines.

Failure to follow these procedures can lead to "voidable" contracts, financial loss, or even legal prosecution for estafa or fraud.

I. The Legal Nature of the Transaction

In a Pag-IBIG mortgage, the member (borrower) holds the title (Transfer Certificate of Title or Condominium Certificate of Title), but the title bears an Encumbrance/Lien in favor of Pag-IBIG. This lien acts as a security for the loan.

Under Philippine law, a mortgagor (seller) has the right to sell the mortgaged property. However, pursuant to the Civil Code and the specific Loan and Mortgage Agreement (LMA) signed with Pag-IBIG, such a sale does not automatically extinguish the mortgage. The debt "follows" the property unless the loan is fully settled or officially assumed by the buyer.

II. Common Methods of Sale

There are three primary ways these transactions occur, each with varying levels of legal security:

1. Full Pay-off (The Safest Route)

The seller uses the proceeds from the buyer to pay the remaining balance of the Pag-IBIG loan in full.

Procedure: Request a Statement of Account (SOA) for Full Payment → Pay the balance → Obtain a Release of Real Estate Mortgage (RREM) from Pag-IBIG → Cancel the lien at the Register of Deeds → Transfer the title to the buyer.
Risk: Extremely low, provided the escrow of funds is handled correctly.

2. Legal Assumption of Mortgage (Substitution of Borrower)

The buyer applies to Pag-IBIG to officially take over the loan.

Procedure: The buyer undergoes credit evaluation → Pag-IBIG approves the "Assumption of Mortgage" → A new loan agreement is signed by the buyer.
Risk: Moderate. Pag-IBIG may deny the buyer’s application based on creditworthiness, leaving the parties in a legal limbo if a downpayment has already been made.

3. "Pasalo" (Sale with Assumption of Payments)

This is an informal arrangement where the buyer pays the seller an "equity" portion and continues the monthly amortizations under the seller's name.

Procedure: Usually involves a Deed of Sale with Assumption of Mortgage and an Irrevocable Special Power of Attorney (SPA).
Risk: High. This is technically a violation of the LMA without Pag-IBIG's written consent.

III. Critical Legal Risks

1. The "Pactum Commissorium" and Transfer Issues

If a buyer pays for a "pasalo" property but the seller disappears or dies before the loan is fully paid, the buyer lacks the legal standing to cancel the mortgage or transfer the title. Since the contract with Pag-IBIG is still in the seller's name, the Fund is not legally obligated to recognize the buyer.

2. Default and Foreclosure

In informal "pasalo" deals, if the buyer fails to pay the monthly amortizations, Pag-IBIG will foreclose on the property. The legal notice of foreclosure will be sent to the original seller (the record owner). The buyer may lose both the property and the "equity" paid to the seller, with little recourse other than a civil suit for damages.

3. Double Sale and Fraud

Without the title being transferred to the buyer's name, an unscrupulous seller could potentially "sell" the same equity to multiple buyers using different sets of SPAs. Under the Torrens System, the person who records the sale in good faith with the Register of Deeds has the superior right; however, you cannot record a sale on a title held in caution by Pag-IBIG without their clearance.

4. Death of the Parties

Seller’s Death: If the seller dies during an informal "pasalo," the property technically forms part of the seller's estate. The heirs may claim the property, and the buyer would have to prove the sale in court, which is costly and time-consuming.
Buyer’s Death: The Mortgage Redemption Insurance (MRI) only covers the registered borrower. If the buyer dies, the loan is NOT extinguished, and the buyer’s family must continue paying, unlike the seller who would have had the loan cleared by insurance.

IV. Required Documentation for a Secure Transfer

To mitigate risk, the following documents are essential in any Philippine real estate transaction involving a mortgage:

Deed of Absolute Sale / Deed of Sale with Assumption of Mortgage: Must be notarized and specify who is responsible for the remaining balance.
Special Power of Attorney (SPA): Specifically granting the buyer the power to:
Communicate with Pag-IBIG.
Claim the Title/Release of Mortgage upon full payment.
Transact with the Bureau of Internal Revenue (BIR) and Register of Deeds.
Statement of Account (SOA): A recent copy from Pag-IBIG to verify the actual outstanding balance and any arrears.
Prior Receipts: Proof of all previous amortization payments.

V. Step-by-Step Procedure for a Valid Sale

Verification: The buyer should verify the status of the property at the Pag-IBIG branch where the loan is maintained. Check for any notices of foreclosure.
Execution of Deed: Parties sign the Deed of Sale. If the buyer is paying the full price, use an Escrow Agreement or ensure the payment is made directly to Pag-IBIG to settle the loan.
Tax Compliance: Pay the Capital Gains Tax (6%) and Documentary Stamp Tax (1.5%) at the BIR within the statutory deadlines (30-days to 5-days of the following month, depending on the tax type) to get the Certificate Authorizing Registration (CAR).
Lien Cancellation: Once Pag-IBIG issues the Release of Real Estate Mortgage, present this along with the owner's duplicate title to the Register of Deeds to "clear" the title.
Title Transfer: Present the CAR, the cleared title, and the Deed of Sale to the Register of Deeds to issue a new title in the buyer's name.