Deed of Assignment and Assumption of Mortgage vs. Contract to Sell: Navigating the Purchase of Mortgaged Property in the Philippines

Introduction

In the Philippine real estate landscape, acquiring a property that is subject to an existing mortgage presents unique challenges and opportunities for buyers and sellers. Mortgaged properties are common, especially in a market where financing through banks or financial institutions is prevalent. Two key legal instruments often come into play in such transactions: the Deed of Assignment and Assumption of Mortgage, and the Contract to Sell. These documents serve distinct purposes but are frequently compared due to their roles in facilitating the transfer of interest in mortgaged real estate.

Understanding these instruments is crucial for buyers to mitigate risks such as foreclosure, title disputes, or financial liabilities. This article explores the intricacies of each, their differences, legal implications, procedural requirements, and practical considerations under Philippine law, primarily governed by the Civil Code of the Philippines (Republic Act No. 386), the Property Registration Decree (Presidential Decree No. 1529), and relevant banking regulations from the Bangko Sentral ng Pilipinas (BSP).

Understanding Mortgaged Property in the Philippine Context

A mortgaged property is one where the owner (mortgagor) has pledged the real estate as security for a loan from a lender (mortgagee), typically a bank. The mortgage is registered with the Registry of Deeds, creating a lien on the title. Under Article 2124 of the Civil Code, a mortgage directly and immediately subjects the property to the fulfillment of the obligation for whose security it was constituted.

When buying such a property, the buyer must address the existing mortgage to ensure a clean transfer of ownership. Failure to do so could result in the buyer inheriting unresolved debts or facing extrajudicial foreclosure under Republic Act No. 3135 (An Act to Regulate the Sale of Property Under Special Powers Inserted in or Annexed to Real Estate Mortgages). Common scenarios include the seller paying off the mortgage before transfer, the buyer assuming the mortgage, or the buyer purchasing the property subject to the mortgage with arrangements for its release.

The Contract to Sell: A Preliminary Agreement for Mortgaged Properties

A Contract to Sell is a bilateral agreement where the seller promises to sell the property to the buyer upon the fulfillment of certain conditions, typically the full payment of the purchase price. It is not a conveyance of ownership but a preparatory contract that obligates the parties to execute a final deed of sale later. This is rooted in Article 1479 of the Civil Code, which distinguishes it from an absolute sale.

Key Features in the Context of Mortgaged Properties

Conditional Nature: Ownership remains with the seller until conditions are met. For mortgaged properties, the contract often includes clauses requiring the seller to settle the mortgage before executing the Deed of Absolute Sale. The buyer may make installment payments, with a portion allocated to mortgage amortization.
Buyer's Protections: The buyer gains equitable interest but not legal title. Under the Maceda Law (Republic Act No. 6552) for residential properties, buyers in installment sales are entitled to refunds and grace periods if they default, though this applies mainly to developers.
Handling the Mortgage: The contract may stipulate that the seller uses buyer's payments to pay down the mortgage. If the property is foreclosed before full payment, the buyer risks losing investments unless protected by specific clauses or remedies like rescission under Article 1191 of the Civil Code.
Registration and Annotation: While not mandatory, annotating the Contract to Sell on the title (via the Registry of Deeds) protects the buyer from third-party claims. For mortgaged properties, this annotation is subordinate to the existing mortgage lien.

Advantages for Buyers

Allows purchase without immediate full payment, ideal for budgeted acquisitions.
Provides time to verify the mortgage status through due diligence, such as obtaining a certified true copy of the title and mortgage contract.
Lower initial risk, as the buyer can back out if conditions (e.g., mortgage clearance) are not met.

Risks and Limitations

No immediate title transfer, exposing the buyer to seller's potential default on the mortgage.
If the seller fails to pay the mortgage, the property could be foreclosed, rendering the contract voidable.
Tax implications: The buyer may face capital gains tax or documentary stamp tax only upon execution of the final sale, but withholding taxes apply to installments.

In practice, Contracts to Sell are popular for Pag-IBIG or bank-financed properties, where the buyer might eventually assume the loan or refinance.

The Deed of Assignment and Assumption of Mortgage: Direct Transfer with Debt Assumption

A Deed of Assignment and Assumption of Mortgage is a tripartite agreement involving the seller (assignor/mortgagor), buyer (assignee), and the mortgagee (lender). It transfers the seller's rights and obligations under the mortgage to the buyer, effectively allowing the buyer to step into the seller's shoes. This is governed by Article 1624 of the Civil Code on assignment of credits and Article 2126 on mortgage extensions.

Key Features

Assignment of Rights: The seller assigns all interests in the property, including any equity built up, to the buyer.
Assumption of Obligations: The buyer agrees to pay the remaining mortgage balance, interest, and comply with loan terms. The lender's consent is essential, as per BSP Circular No. 799, Series of 2013, which regulates loan assumptions.
Release of Seller: Upon approval, the seller is typically released from liability, though some lenders require joint and several liability until full payment.
Documentation: The deed must be notarized and registered with the Registry of Deeds. It includes details like the original mortgage amount, outstanding balance, and new payment terms. Annotation on the title cancels the old mortgage entry and notes the assumption.

Procedural Requirements

Lender Approval: Banks conduct credit checks on the buyer, similar to a new loan application. Fees for assumption (e.g., processing, appraisal) apply, often 1-2% of the loan balance.
Due Diligence: Buyer should review the mortgage contract for prepayment penalties or adjustable rates.
Tax Considerations: Subject to documentary stamp tax (DST) under Section 196 of the Tax Code, and possible capital gains tax if the assignment is deemed a sale.
For Properties Under Pag-IBIG or GSIS: Special rules apply; for instance, Pag-IBIG Fund allows assumptions with membership requirements.

Advantages for Buyers

Enables purchase without paying off the entire mortgage upfront, preserving cash flow.
Potentially lower interest rates if assuming an existing favorable loan.
Immediate transfer of equitable title, with legal title following upon full payment and mortgage release.

Risks and Limitations

Buyer inherits any issues with the loan, such as arrears or disputes.
If the buyer defaults, the lender can foreclose without recourse to the original seller (if released).
Higher upfront costs due to assumption fees and possible restructuring.
Not all mortgages are assumable; some loans have "due-on-sale" clauses prohibiting assumptions without payoff.

This instrument is common in resale of subdivision lots or condominiums where the original developer mortgage is transferred.

Comparative Analysis: Deed of Assignment and Assumption of Mortgage vs. Contract to Sell

While both facilitate buying mortgaged properties, they differ fundamentally in structure, risk allocation, and transfer mechanics.

Aspect	Contract to Sell	Deed of Assignment and Assumption of Mortgage
Nature	Conditional agreement; no immediate transfer of ownership.	Direct assignment of rights and obligations; equitable transfer upon execution.
Mortgage Handling	Seller retains responsibility; buyer pays indirectly through installments.	Buyer directly assumes mortgage with lender consent.
Title Transfer	Deferred until full payment and mortgage clearance; followed by Deed of Sale.	Immediate annotation; full title upon mortgage release.
Buyer's Liability	Limited to payments made; can rescind if seller defaults.	Full liability for remaining debt; personal obligation to lender.
Lender Involvement	Minimal; seller deals with lender unless assumption is later arranged.	Mandatory; tripartite agreement with credit approval.
Risk to Buyer	Higher risk of seller's mortgage default leading to foreclosure.	Risk of inheriting loan issues, but direct control over payments.
Costs	Lower initial; taxes deferred.	Higher due to assumption fees, but potentially savings on new loan origination.
Applicability	Suitable for installment buyers not qualifying for immediate assumption.	Ideal for creditworthy buyers wanting to leverage existing loan terms.
Legal Remedies	Rescission, damages under Civil Code; Maceda Law protections for installments.	Enforcement as a mortgage contract; foreclosure remedies for default.

In essence, the Contract to Sell is more buyer-friendly for phased payments without assuming debt immediately, while the Deed of Assignment shifts control and liability to the buyer sooner, requiring stronger financial standing.

Legal Implications and Practical Considerations

Compliance with Laws

Anti-Money Laundering: Transactions must comply with Republic Act No. 9160, requiring due diligence on parties.
Consumer Protection: For bank mortgages, BSP regulations ensure fair terms; buyers can seek remedies under the Financial Consumer Protection Act (Republic Act No. 11211).
Foreclosure Risks: Under Act No. 3135, foreclosure can occur if payments lapse, affecting either instrument.
Spousal Consent: If the property is conjugal, consent under the Family Code (Article 124) is needed.

Due Diligence Essentials

Verify title via Registry of Deeds search for encumbrances.
Obtain loan statements to confirm balance.
Engage a lawyer for contract review to avoid voidable clauses under Article 1390 of the Civil Code.
Consider title insurance for added protection.

Common Pitfalls

Assuming non-assumable mortgages without consent, leading to acceleration of debt.
Overlooking real property taxes (RPT) or association dues, which could become buyer's burden.
In Contracts to Sell, vague clauses on mortgage settlement can lead to disputes.

Alternatives

If neither fits, options include a Deed of Sale with Mortgage (buyer mortgages the property anew) or outright payoff with a new loan.

Conclusion

Purchasing a mortgaged property in the Philippines demands careful selection between a Contract to Sell and a Deed of Assignment and Assumption of Mortgage, each tailored to different buyer profiles and risk appetites. The former offers flexibility and lower entry barriers, while the latter provides direct engagement with the debt for potentially better terms. Ultimately, consulting legal and financial experts ensures compliance and safeguards interests, turning a complex transaction into a secure investment in the dynamic Philippine real estate market.