In the event you have some credit problems you do not need to qualify for a mortgage in order to assume one. However, when the mortgage comes up for renewal the lender may not renew the mortgage if the buyer’s credit is not satisfactory. A buyer in this situation should be cautious and should look for a mortgage term that will give the buyer enough time to demonstrate a good payment record with the lender before the mortgage comes up for renewal.

Some sellers will want you to qualify with their lender so that they can get a release from their obligations if the mortgage was insured under the National Housing Act. The reason for this is that in Alberta an individual who takes out a mortgage or assumes a mortgage that is insured by the Canadian Mortgage Housing Corporation (CMHC) under the National Housing Act can be held responsible for any deficiency, which results from a foreclosure on the property during the life of the mortgage no matter who the owner of the property is.

The interest rate and term of an existing mortgage may be advantageous over the going rates offered by lenders but it should be recognized a buyer does not have the flexibility to chose different terms depending on their view of future interest rates and the risk or benefit of future changes.

The assuming of a mortgage will reduce your legal cost of purchasing because your lawyer will not have to prepare and register a new mortgage. The seller may also be willing to sell the property for a reduced price because they may be saving a significant amount of money, if they don’t have to pay the lender a payout penalty. There will be payout penalties on any closed term mortgage whether new or assumed, but the terms of the payout penalties and repayment privileges should be reviewed prior to accepting a mortgage. Also some lenders have given cash back advances at the beginning of the mortgage and if the mortgage is paid out early or even assumed the lender may want to recover the cash back or some portion of it. In the event you assume a mortgage and then pay it out before you had intended, unusual pay out penalties and repayment of cash back, which you did not receive, may strip you of the benefits you thought you were receiving by assuming a mortgage.

It should also be noted that if someone takes out a mortgage on a property and deceives the lender in order to induce the lender into advancing the mortgage proceeds that person has committed fraud. If a subsequent buyer assumes the mortgage and was involved in the deception they may also be guilty of the criminal act. An example of this type of fraud is when a person purchases a property and finances it with high ratio financing, which is permitted if the person is buying the property for their residence. They advise the lender that it will be their residence and with some lenders swear under oath that they will occupy as a residence, but do not. The property is then sold to another person who does not qualify for a mortgage or does not qualify for a high ratio mortgage. Both of the parties may be guilty of fraud and possibly perjury. Defending criminal charges could considerably increase your legal cost of buying a home.

The first change is a legislative change. The Law of Property Act was amended to allow a lender to pursue a deficiency against individuals who placed a high ratio mortgage or anyone who held title while the mortgage was in place. This means that if you take out a mortgage for more than 75% of the value of the land and the mortgage goes into default, the property is taken and sold, and if the amount realised from the sale is not enough to pay out the lender everything they are owed including all costs, then the lender can sue you for the deficiency. This applies to the individual who set up the mortgage and any one else who assumed the mortgage. Therefore allowing someone to assume a high ratio mortgage creates a risk because the seller is not in control of whether the buyer will allow the mortgage to go into default.

This is not a dramatic change. Previous to the change any mortgage insured under the National Housing Act (Canadian Mortgage and Housing Corporation CMHC) was under the same rules in Alberta. The change only allowed other insurers the same rights to level the playing field.

The second change that appears to be happening is that lenders are taking the position mortgage assumptions must be approved by the lender. Historically most lenders have a paragraph in the mortgage that requires the mortgage to be repaid in full if the property is sold. This is known as the “due on sale clause”. In Alberta the courts have given relief to a purchaser who had assumed a mortgage and kept the payments current, when the lender tried to foreclose because the mortgage had not been paid in full on the sale.

This led to the understanding that all mortgages are assumable and only those, which allowed a lender to pursue a deficiency, would have a risk attached to letting someone take over your mortgage.

A good number of lenders appear to be now saying that relief was only given in specific circumstances and that some time has passed since such a court decision and lenders will enforce the due on sale clause if mortgages are assumed without their consent. Consent from a lender will usually mean they have received credit information from the buyer and are satisfied that the buyer would qualify to borrow the amount owing on the mortgage.

One of the ways that lenders avoid the assumption happening without their approval is to refuse to provide a mortgage assumption statement prior to giving consent to the assumption. This causes problems in calculating how much cash the buyer must give to the seller. However, lenders are obligated to provide a statement of mortgage particulars if requested (for a fee), which could be used to determine the assumption value.

The risk is that the buyer after assuming the mortgage might be faced with the lender commencing foreclosure for breach of the due on sale clause. If the lender is successful the property is sold at forced sale price and foreclosure costs come out of the sale proceeds, leaving the buyer out money and maybe liable for a deficiency (seller may also be liable for a deficiency if the high ration provisions apply). Most buyers will not want to risk assuming a mortgage, when the lender is opposed to it and may commence foreclosure.