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.
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