Taking over an existing commercial mortgage
Inheriting the seller's loan can be a good outcome. It is never a way around qualifying.
The short answer
An assumption means taking over the seller's existing mortgage instead of arranging a new one. It works only where the loan is assumable, the lender approves you as the new borrower on the same underwriting it would apply to a new application, and you accept the terms already written in the document.
- Not every commercial mortgage is assumable, and the document decides, not the parties.
- The lender underwrites you in full, so an assumption is not a shortcut around qualifying.
- The seller is not automatically released, and getting a release of covenant is a separate negotiation.
- You inherit the existing terms exactly, including the prepayment terms and the maturity date.
Why anyone bothers
Usually one of two reasons. The first is that the rate written into the existing mortgage is better than what is available today, so the buyer is effectively acquiring a financing advantage along with the building. The second is that the seller faces a prepayment charge on payout that everyone in the transaction would rather avoid, and an assumption sidesteps the payout entirely.
The second reason is often the stronger one, because commercial prepayment charges can be substantial and are set at commitment rather than at payout. What those charges look like, and why they behave the way they do, is set out on the commercial mortgage prepayment penalty page.
What the lender actually does
A full credit review of the incoming borrower. Financial statements, net worth and liquidity, experience with the asset class, and the same guarantee structure the lender would ask of a new applicant. Then a review of the property, and depending on how old the existing file is, a fresh appraisal or a new environmental report, because a lender will not carry a five year old view of a building into a new borrower relationship.
Then the costs. An assumption fee set by the lender, the lender's legal costs, and your own legal costs. None of that is unusual, but it should be budgeted rather than discovered.
Say the timing point plainly, because buyers get it wrong. An assumption is not automatically quicker than a new mortgage and can be slower. It moves at the existing lender's pace, and unlike a competitive placement there is no other lender waiting in the wings to create urgency. If your closing date is tight, an assumption is not the safe choice simply because the loan already exists.
Release of covenant, and why the seller cares more than you do
An assumption transfers the property and the payment obligation. It does not automatically remove the seller from the loan. Without a release of covenant the seller stays personally liable on a mortgage secured against a building they no longer own and no longer control, which is an uncomfortable position to hold for the balance of a term.
This is the seller's negotiation, not the buyer's. Lenders do not always grant a release, and where they do it is usually conditional on the incoming borrower presenting at least as well as the outgoing one. The wording and the effect of any release are legal questions for the seller's lawyer, and the seller should have that advice before agreeing to an assumption rather than after closing.
Insured loans add a step
Where the existing mortgage is CMHC insured, the insurer's approval process applies as well as the lender's, and the two run in sequence rather than in parallel. That adds time to a file that was already moving at one lender's pace. Build the extra step into the closing date rather than hoping it moves quickly. How insured financing works, and why it is priced and processed differently, is covered on the CMHC insured commercial financing page.
Assumption questions.
Buying a building with a mortgage already on it?
Send us the existing commitment and the mortgage document. We will tell you whether assuming beats replacing it.