The Mortgage Loan Assumption Process

Assuming a mortgage loan in a real estate purchase and sale transaction can be an attractive way to preserve favourable financing terms and avoid the cost and uncertainty of obtaining a new loan. However, stepping into an existing mortgage loan involves more than simply taking over payments.

Here are five important matters to be taken into consideration on the seller’s side and the buyer’s side when navigating the assumption process:

1. Ensure full disclosure of documents. Because the buyer will be expected to step into the seller’s shoes as borrower under the loan documents, it is important for the purchase agreement to require the seller to provide full disclosure of all loan and security documents, including the commitment letter, loan agreement and all collateral security documents and registrations.
2. Review loan documents closely. The buyer and its lawyers should review the terms of all loan and security documents to ensure that the documents match the buyer’s expectations, identifying any unusual provisions or obligations such as onerous leasing covenants, reserve requirements or early payment obligations that the buyer was not anticipating.
3. Obtain lender consent. The lender’s consent will almost certainly be required to permit both the transfer of the property to the buyer and the buyer’s mortgage assumption. Concurrently with requesting this consent, requests for amendments to the loan terms or any releases of existing covenantors should be made to the lender for its consideration and approval. This process can take time, so sufficient lead time should be factored into the transaction timelines.
4. Settleon the mortgage assumption agreement. Both the seller and the buyer should review the draft assumption agreement closely to ensure it is consistent with the lender’s initial consent letter and is not overreaching on the lender’s part. The buyer will want to ensure that the draft refers only to the loan and security documents that have been disclosed to the buyer, or further disclosure of documentation may be needed.
5. Determine responsibility for lender’s fees. The buyer and the seller should allocate responsibility in the purchase agreement for the lender’s assumption fee and for the fees of the lender’s legal counsel associated with the assumption process, since the lender will expect these to be borne by the borrower’s side. Often, the parties agree to split these costs, but it is also possible for either the seller or the buyer to bear them entirely.

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