To assume a promissory note is to take over someone else’s “promise” to pay off a named debt. In real estate, a homebuyer signs a promissory note with the lender, thereby making a legal promise to complete the payments on the property that he is purchasing. When another party assumes a promissory note, that party takes on the legal obligation to fulfill the debt. As a result, the assumption of a promissory note is a legal activity that requires full documentation and careful preparation to ensure that the transfer takes place without any loose ends.
The assumption of a promissory note is almost always the assumption of a debt. While this might sound negative, in the case of real estate the assumption of a promissory note almost always involves a transfer of rights to a piece of property that still has a mortgage. For example, suppose Jack has asked Jill to move in with him, and Jill has graciously agreed to assume the loan on the property. To do so, Jill must do more than just begin sending in the mortgage check each month: she must officially assume the promissory note as well, in order to show legally that she is now responsible for the debt.
When one party decides to assume the loan from another party, the process requires careful documentation. Returning to the example of Jack and Jill, if Jill does not document her assumption of the promissory note, Jack is still legally responsible for the debt. Additionally, Jack retains an ongoing right to the property, even though Jill might be making the payments. By assuming the promissory note legally, however, Jill ensures not only the right to the debt but also the right to the property.
Completing an official assumption of a promissory note guarantees that any transfer is completed and that the party giving up the promissory note does not maintain any obligation toward it. To use another example, suppose Jacob initially took out a loan so his college-age daughter Dinah could have a car. When Dinah finishes college and gets a good-paying job, she takes over the rights to the car by assuming the promissory note. Otherwise, if Dinah loses her job and cannot make payments on it, Jacob can still be held responsible for the debt, long after he has no responsibility for the vehicle.
The most obvious disadvantage of the assumption of the promissory note is that the party who assumes the note becomes responsible for the obligation of paying off the debt. Should the party who made the assumption decide that he no longer wants to continue paying the debt, he is still responsible for it and cannot turn it back over to the original owner without further documentation.
Real estate experts warn that those who want to assume a promissory note on a piece of property should consult a real estate attorney to ensure that all documentation is completed correctly. An incorrect or poorly documented assumption of a promissory note can create extensive legal problems regarding the ownership of the property and the responsibility of all involved parties toward it.