How to buy a house with an existing mortgage?
If you are interested in a home that already has a mortgage, and you are thinking “how can I buy a home that already has a home loan on it”, there are a few different ways.
First of all, you need to ask yourself the question if you need a mortgage or not. Do you need a mortgage?
Well then you can simply use your cash to purchase the home, and the current owner who is selling you the home can pay off the mortgage with the proceeds from the sale that you have given him in cash and keep whatever is left over. Now, you are not giving the money directly to the seller, there is an entire process around this that requires both of you to engage your own notary or lawyer. It is also likely that you will both have engaged realtors. If the seller has a realtor, you most definitely want to have some representation i.e. your own realtor. While in certain circumstances, you are able to use the seller’s realtor, it is not recommended. Some would use the analogy of going to court when you are the defense and asking for the prosecution for tips on your case.
What if you do need a mortgage?
There are typically 2 scenarios that you can look at. If the home currently has a mortgage on it and you are looking to buy the home, then your first option could be to check to see if you can get your own mortgage from your own lender. This is what most people do, most of the time. Traditionally, you would go and get your mortgage on your own, and once approved, follow the same process as if you had cash, your lawyer or notary would handle the transaction and pass the money over to the seller and arrange for the transfer of title.
Another option that you have, which is not so conventional, is to try to assume the seller’s mortgage. You may want to consider this option if the seller’s current mortgage is more attractive than a mortgage you would get on your own. You would have to check with the seller’s mortgage holder to see whether the mortgage is assumable or not. Most mortgages in Canada are assumable, and yet we do not see this very often because typically the seller / current mortgage holder is held accountable for a minimum of 1 year if the buyer/ assumer of the mortgage stops making payments, the lender has the right to go back to them. This is not in the best interest for most sellers, as typically they do not know the buyers very well.
Years ago, you used to be able to assume mortgages from someone without having to qualify for the mortgage – and therefore this policy made a lot of sense from the lender’s perspective. Nowadays though, there are not any lenders in Canada that do not require the person assuming the mortgage to qualify. If you as a buyer are required to qualify for the mortgage and meet the lender guidelines, having the seller/current mortgage holder on the hook after the fact does not really make a whole lot of sense.
There is another way to buy a house that already has a mortgage on it, and that is through another little known process known as an Agreement For Sale. This scenario makes a lot more sense if the buyer has the means to pay but does not have the means to qualify for the mortgage required, and the seller needs to get out of the property. The buyer can give the seller a cash deposit or down payment, and the seller can keep the mortgage in his name and the title in his name as well, however through a third party legal document, the responsibility of the property and ownership gets transferred over to the new buyer for all legal intents and purposes.
Another type of Agreement for Sale is known as a Rent to own Contract. Essentially, the seller /owner of the property will “rent the property” back to the buyer, and the buyer will have essentially the right to live there and pay the deposit or down payment to the seller/owner.
The main difference between an Agreement for Sale and a Rent to own contract is that with the rent to own – the rights of ownership still belong to the seller, and in the Agreement for Sale, the rights of ownership and responsibility are legally transferred over via a third party document to the new buyer.
These are the main ways that you can buy a house that already has a mortgage on it. Of course there are a lot more moving parts and intricate details that need to be covered, which cannot be addressed in this article or post. A knowledgeable mortgage broker should be able to walk you through the specifics in your relative context and help you decide whether these options and scenarios make sense for you.