Legal Requirements, Typical Structures, and Key Risks

General information only. This article discusses common legal and practical issues in Philippine “pasalo” transactions involving an existing housing loan. It is not legal advice and does not create a lawyer-client relationship.

1) What “pasalo” usually means (and why the term is legally slippery)

In everyday Philippine real estate practice, “pasalo” refers to a private arrangement where a new buyer takes over a property that is still being paid—often with the buyer also taking over the remaining loan payments.

Legally, however, there are different possible transactions hiding under the single word “pasalo,” and the rights/risks change drastically depending on which one you actually do:

A. True Assumption of Mortgage (with lender approval)

The buyer is approved by the lender and formally replaces the original borrower as debtor (or becomes co-borrower, depending on structure).
This is the “clean” path—if properly documented and implemented.

B. Sale/Assignment “subject to mortgage” (without lender approval)

The seller “sells” or assigns rights to the buyer, and the buyer promises to pay the loan,
but the lender was never asked/never approved.
Legally common, but high-risk because the original borrower typically remains liable to the lender.

C. Possession-only or downpayment takeover

Buyer pays the seller’s equity/downpayment and moves in,
but title/loan remain in seller’s name for a long time.
This is the riskiest category because the buyer’s position may be mostly contractual (and fragile).

Bottom line: In Philippine law and lending practice, “pasalo” is not a single standardized transaction. The safest version is the one that results in a lender-approved assumption/transfer and properly updated ownership/registration records.

2) How a Pag-IBIG housing loan changes the analysis

A Pag-IBIG housing loan is typically secured by a real estate mortgage on the property. That means:

The property is collateral, and the lender’s rights are strong.
Most loan documents include restrictions against selling/assigning the property or the borrower’s rights without the lender’s consent.
Even if the buyer pays faithfully, the lender may still treat the original borrower as the accountable debtor unless the lender formally recognizes a substitution/assumption.

So, the central legal question is not “Can you pasalo?” but rather:

Will the lender recognize the buyer as the new borrower (and release the old one)?

If not, your “pasalo” is essentially a private side deal running alongside a mortgage loan the lender still controls.

3) The core legal concepts involved

3.1 Novation / substitution of debtor (why consent matters)

An “assumption of mortgage” is, in substance, a change of debtor. Under the Civil Code principles on obligations and novation, substituting a debtor generally requires the creditor’s consent, because the creditor is entitled to choose who owes it money.

Practical effect:

If the lender does not consent, the lender can still pursue the original borrower for unpaid amortizations, penalties, and foreclosure consequences.

3.2 Sale “subject to mortgage” vs. assumption

Sale subject to mortgage: Buyer acquires property interest but accepts that it remains mortgaged; lender can foreclose if unpaid.
Assumption: Buyer is recognized by the lender as the one who must pay; ideally, the seller is released.

These are not interchangeable. Many “pasalo” deals are sale/assignment subject to mortgage in reality, even if parties call it “assumption.”

3.3 Registration and third-party protection

Philippine property rights are heavily influenced by registration (Registry of Deeds) and the Torrens system. If you rely on unregistered, private documents while the title remains in another person’s name and is mortgaged, your rights can be vulnerable to:

competing claims,
double-sale scenarios,
attachment/levy due to seller’s creditors,
spouse/heir claims,
fraud.

4) Typical “pasalo” structures for a Pag-IBIG-loaned property

Structure 1: Lender-approved Assumption (recommended if available)

Goal: Buyer becomes the recognized borrower; seller is released; records are updated.

Common flow:

Parties agree on price (equity + loan balance handling).
Buyer applies for assumption/transfer (credit evaluation).
Upon approval, parties sign lender-required documents plus sale/transfer documents.
Payments, possession turnover, and any title/annotation steps are completed.

Legal advantage: The private agreement aligns with the lender’s rights, reducing the chance of the lender treating it as a breach.

Structure 2: Private sale/assignment + buyer pays loan, title stays with seller for now

Goal: Quick transfer of possession; buyer pays amortization; formal transfer is postponed.

This is common when:

the buyer fears disqualification under lender rules,
the parties want speed,
the title is not yet easily transferable,
or the seller needs cash immediately.

Legal reality: The lender still sees the seller as borrower unless there is formal lender recognition. This is where many disputes arise.

Structure 3: Rights transfer while property is not yet titled to borrower

Some properties are under:

a contract-to-sell with a developer,
condominium projects with documentation still in progress,
or properties where title release/transfer is not yet complete.

In these cases, the “pasalo” may be an assignment of rights rather than a straightforward sale of titled land—adding extra layers: developer consent, project restrictions, and timing risks.

5) Legal and documentary requirements (what you generally need to do it properly)

5.1 Essential pre-checks (before money changes hands)

Confirm the property’s current status
- Who is on the title?
- Is the title annotated with a mortgage?
- Is there a developer involved?
- Is the property occupied by others?
Verify loan status
- Outstanding balance (principal + interest)
- Arrears/penalties (if any)
- Updated payment history
Check for legal capacity and consent issues
- Seller’s marital status and spousal consent (often crucial)
- If seller is abroad, check SPA validity
- If seller is deceased, beware: heirs/estate settlement issues

5.2 Due diligence on the property and title (non-negotiable in safer deals)

Obtain a certified true copy of the title (or relevant ownership document) from the Registry of Deeds.
Obtain a current tax declaration and check real property tax payment status.
Check for:
- other annotations (lis pendens, attachments, adverse claims),
- boundary/identity issues,
- HOA/village dues, condominium dues, utilities arrears.

5.3 Core documents typically involved

Depending on structure, you usually see some combination of:

For the transfer between seller and buyer

Deed of Absolute Sale or Deed of Sale with Assumption of Mortgage
Or Deed of Assignment of Rights (when title is not yet in seller’s name or transaction is “rights-based”)
A clear payment schedule/acknowledgment of receipt
Turnover document (possession, keys, inventories, utility meter readings)

For lender-facing assumption

Buyer’s qualification documents (IDs, income, employment/business proofs, etc.)
Lender forms for assumption/transfer
Updated borrower/seller documents
Sometimes: new loan documents reflecting the substituted borrower, and arrangements on insurance, accounts, etc.

Authority documents (when needed)

Spousal consent / marital documents
Special Power of Attorney (SPA) if signing through representative
Government IDs with specimen signatures

5.4 Notarization, taxes, and registration (critical for enforceability and protection)

Even a well-written contract can be weak if not properly formalized.

Common requirements in a clean sale/transfer:

Notarization of the deed (to convert it into a public instrument)
Payment of applicable taxes/fees (often includes capital gains tax or other tax treatment depending on circumstances, documentary stamp tax, transfer tax, registration fees—actual allocation is negotiable but must be settled)
Registration with the Registry of Deeds and updates to local tax records (when the transaction is ready/allowed to be registered)

Important practical note: In many “pasalo” deals, parties skip registration because the mortgage/title situation makes immediate transfer difficult. This increases risk for the buyer because third-party protection is stronger when rights are properly registered.

6) The biggest risks (and who bears them)

6.1 Risks to the buyer (the usual “naiipit” scenario)

Seller remains the legal borrower
- If the seller later refuses to cooperate, disappears, dies, or is sued, the buyer can be stuck paying a loan for a property still legally controlled by someone else.
Foreclosure risk despite payment
- If payments are mishandled, interrupted, or not credited properly, the lender can foreclose. The buyer may have limited standing with the lender if the lender doesn’t recognize the buyer.
Invalid or unenforceable documents
- Fake titles, forged signatures, defective notarization, missing spousal consent, or a void SPA can collapse the transaction.
Double sale / multiple claimants
- If the seller sells again to another buyer or uses the property to secure another obligation, the buyer may face long litigation.
Hidden liens and obligations
- Attachments, unpaid dues, tax delinquencies, or HOA/condo arrears can surface later.
Marital and family law landmines
- If the property is conjugal/community property, a spouse who didn’t consent may challenge the sale.
- If the seller dies, heirs may dispute the arrangement—especially if ownership never transferred.
Misalignment between “possession” and “ownership”
- Moving in is not the same as owning. Eviction disputes can arise if relationships sour.
Insurance and casualty issues
- If the property is damaged, claim proceeds may be payable to the mortgagee/registered owner; buyers may be left out without proper endorsements.

6.2 Risks to the seller

Continuing liability
- If the buyer stops paying, the lender pursues the seller; credit standing, penalties, and foreclosure consequences fall on the seller.
Tax and legal exposure
- If the transaction is undocumented or poorly documented, the seller may face disputes, collection suits, or accusations of fraud.
Possession given up without full protection
- If the seller turns over possession before secure payment mechanisms, recovery can be difficult.

6.3 Risks to both parties (systemic “pasalo” risks)

Informal side deals conflicting with mortgage covenants
Payment proof problems (cash payments without receipts, no paper trail)
Breach-of-contract disputes due to vague terms (who pays what, when, and what happens upon default)

7) Red flags that should stop a “pasalo” immediately

Seller cannot produce authentic, verifiable title/ownership documents.
Seller refuses to allow verification of loan status and payment history.
Seller insists on large cash with no clear deed, receipts, and identification.
Documents are “notarized” irregularly (e.g., parties did not appear; suspicious notary).
Seller is married but spouse will not sign (or spouse is “unavailable” with no solid proof/SPA).
The story relies on “trust me” intermediaries who will not disclose identities, documents, or audit trails.
Buyer is told: “No need for lender approval, standard lang ’to”—especially when the loan documents restrict transfers.

8) Practical risk-reduction measures commonly used (without turning it into a fake assumption)

If lender-approved assumption is not available or not yet possible, parties often try to reduce risk contractually. These do not eliminate core lender/title risks but can prevent common failures:

8.1 Payment controls

Escrow-like arrangements (through reputable channels) tied to document milestones
Clear allocation: equity vs. reimbursement vs. loan payments
Written proof for every payment (bank transfer trail, official receipts where possible)

8.2 Documentation controls

A deed that clearly states whether it is:
- a sale subject to mortgage,
- an assignment of rights,
- or a sale with intended future assumption (with timelines and conditions)
A strong default clause (what happens if buyer stops paying; what happens if seller refuses to sign future documents)
Warranties from seller (ownership, no other sale, no hidden liens beyond disclosed mortgage)
Indemnity provisions (who pays if undisclosed obligations appear)

8.3 Operational controls

Written turnover protocol
Utility account handling plan
HOA/condo dues verification
A plan for eventual formal assumption/transfer (deadlines, cooperation duties, consequences)

Caution: Some parties attempt to “simulate” lender consent or pretend the buyer is the borrower. That can backfire badly. The safest path remains alignment with lender requirements.

9) Common dispute scenarios (what typically goes wrong in real life)

Buyer paid for years, seller refuses to sign transfer
Seller dies; heirs contest the deal
Buyer defaulted; seller sued/collection/foreclosure initiated
Property was already encumbered/attached; buyer discovers too late
Fake notarization or forged signatures
Double-sale: two buyers, one title

In many of these, the party with registered rights and clean documentary proof has the advantage.

10) A realistic “compliance” checklist for a safer Pag-IBIG-related pasalo

(1) Identity and authority

Verify IDs, signatures, marital status, and spouse consent
Validate any SPA with care

(2) Property verification

Certified true copy of title / relevant ownership documents
Confirm mortgage annotation
Check taxes, dues, and other annotations

(3) Loan verification

Confirm outstanding balance and arrears
Confirm payment posting method and records

(4) Contract quality

Use correct instrument for the real situation (sale vs assignment vs intended assumption)
Clear price breakdown, milestones, and default remedies
Clear cooperation duties for future lender/registry steps

(5) Formality and proof

Notarize properly
Maintain bank trails and written receipts
Document turnover and ongoing payments

(6) Lender alignment (best practice)

Pursue lender-approved assumption whenever available and feasible

11) Key takeaways

The main legal risk in most “pasalo” deals is the mismatch between a private agreement and a mortgage loan the lender still controls.
A buyer paying amortizations does not automatically become the borrower in the lender’s eyes, nor the owner in the registry’s eyes.
The safest approach is a lender-recognized assumption/transfer supported by strong due diligence, proper documentation, and correct notarization/registration steps when possible.
Where formal assumption is delayed or impossible, the buyer’s protection depends heavily on document quality, proof of payments, and the seller’s continuing cooperation—all of which can fail without safeguards.