Warning on Conventional Mortgage Assumptions in Real Estate Transactions in Alberta
It used to be the case in Alberta that mortgage companies had little to say when new purchasers wished to finance their transactions by assuming the seller’s conventional mortgage.[i] This is no longer the case.
Mortgage companies are now almost invariably including ‘due on sale’ clauses in all residential mortgages.
The clause means that if a mortgage is to be assumed, the seller must first notify the mortgage company with information about the purchaser (no doubt information about the purchaser’s credit worthiness), and obtain written approval from them. If approval is not obtained, the mortgage company can demand immediate payment in full.
We recommend the following steps be taken writing up a real estate contract involving assuming a seller’s mortgage;
1. Ensure that if financing is planned to occur by a mortgage assumption, the seller must first notify the mortgage company of this intention, and the purchaser will have to provide information to that company.
2. Include as a condition to the transaction that the mortgage company allows the assumption by the purchaser. The condition should also require the seller and purchaser to contact the mortgage company in a timely fashion, and provide whatever information the mortgage company reasonably requires.
A further difficulty may be encountered where for example parents go on the title with a child to help out the child to obtain new financing where the child would not otherwise qualify. In this situation often the parents believe that shortly after the close of the purchase, they can transfer the title to their child with that child in effect assuming the mortgage for him or herself. In this situation the ‘due on sale’ clause may very well result in the mortgage company refusing the ‘assumption’ and requiring payment in full of the mortgage.
We recommend that parents and children be made aware that in the above situation the parents will need to stay on title for the longer term, until their child can qualify without them.
We hope this information is useful in structuring real estate sales and purchases.