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Warning Signs of Assumable Mortgage Fraud

December 23, 2016

Assumable mortgages can appear to be a fantastic deal, when in reality they are an opportunity for fraud. Knowing how to protect yourself from a fraudulent mortgage assumption is important.

Even financial institutions have become victims of assumable mortgage fraud. In December 2005, six Edmonton, Alberta residents were implicated in a case that involved 30 million dollars in losses for one large Canadian bank. This was just one in 27 hundred cases within that province.

When Does Fraud Occur?

The fraud may occur at several junctures. For example, first time home buyer Brandy Peacock found herself facing two demand letters when the person who she assumed the loan from, didn’t record her name with the trust company that held the mortgage.

Instead, the person she assumed the loan from went on to use the equity in the home to secure at least two additional mortgages on the property. Each month when she paid her mortgage, her payments were going to four different lenders. Until she received the demand for payment, she didn’t even realize this was happening.

She almost lost her home. Fortunately, she was able to pay the demand notes out in full and was able to avoid foreclosure when she turned to a mortgage broker who connected her with refinancing.

Arrangements Where the Lender Doesn’t Know About the Assumption

If the person you are assuming the loan from doesn’t want the lender to know about it, don’t assume the mortgage. Because most lenders require notification of the sale or transfer of a property, this is clearly fraud. You could find yourself facing a lender who demands the balance left on the note. This is because most mortgages include a “due-on-sale” clause.

The law recognizes that transfer of a piece of property as a “sale,” so with the only exception in North America, being Alberta’s lack of enforcement of “due-on-sale” clauses, don’t take the risk if you live elsewhere. Federal law in the U.S. recognizes the enforceability of due-on-sale clauses and so do the Supreme Courts in the remaining provinces and territories in Canada.

Even if lenders are turning a blind eye to mortgage assumptions in general, it remains risky to ignore the due-on-sale clause. Mortgages notes are often sold, and the new owner of the note may decide to call the loan when he/she becomes aware of the arrangement.

Rent to Own or Lease Option to Buy

While not all rent-to-own or lease-to-buy options involve fraud, if the seller tells you that doing a lease option instead of a sale won’t trigger the lender’s due-on-sale clause, you need to check with a real estate attorney first. In some jurisdictions, any lease that extends past three years may trigger the due-on-sale clause. Other jurisdictions recognize any inclusion of an option to purchase as justification for demanding the balance on the loan.

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