MORTGAGE FRAUD PROTECTION

If your home or any other real estate holding(s) is/are mortgage-free or know someone fortunate

enough to be in this position, then you should keep reading.

Throughout the past few years, a huge spike has occurred in real estate fraud throughout Canada and

BC, but there is a way to prevent it. we can help prevent it. Real estate fraud is becoming more and

more common. Where it was once unheard of for someone to pose as an owner and sell a property

belonging to someone else, this is no longer a rare incident.

There are 2 main types of fraud – mortgage fraud and title fraud.

The typical mortgage fraud scenario occurs when a fraudster uses false identification to impersonate the

true owner of the property. Using this false identification, the fraudster approaches a lender, has a

mortgage approved and signs all the necessary documents. Neither the lender nor the lawyer/notary is

aware that the identification is false, resulting in a charge on title. By the time the true owner learns of

the mortgage, the fraudster has vanished. Unfortunately, the true owner of the property must bear the

expense of cancelling the mortgage.

A rarer, yet more serious, fraud is title fraud. Again, using false identification, the fraudster approaches a

realtor to list the property. The contract of purchase and sale is entered, and again all necessary

documents are signed using the false identification. Neither the realtor nor lawyer/notary is aware that

the identification is false, resulting in a transfer of title from the true owner to an innocent third-party

purchaser. By the time the true owner learns of the transfer, the fraudster has vanished.

The effects of title fraud are much more serious, and often devastating. Why? Because in British

Columbia a person may lose their home if the fraudster sells to an innocent third party. Yes, someone

could forge the identity of an unsuspecting homeowner, sell that property to a bona fide purchaser who

has no knowledge of the fraud, and the current homeowner loses their home. The true owner can apply

for compensation from the Assurance Fund which is administered by the Land Title and Survey

Authority; however, the bona fide purchaser will retain title to the home.

Fraudsters prefer to work with properties that are ‘free and clear’ of all financial charges, so an owner

could place a line of credit type mortgage on title. This will reduce, but not eliminate the risk of title

fraud. Alternatively, the true owner could obtain a title insurance policy to cover the costs of clearing

title or compensate for the loss of title. Again, this does not eliminate or even reduce the risk of title

fraud, title insurance only offers an easier path of compensation. Title insurance, however, will not

prevent mortgage or title fraud.

 

The only way to prevent real estate fraud from ever occurring for mortgage-free homes is to pull and

secure the Duplicate Indefeasible Title Certificate (DIT) from the Land Title Survey Authority (LTSA). By

pulling the DIT from the LTSA, the title to the home is effectively frozen, ensuring no party (even the

homeowner) can place a charge on the title, or transfer title to a third party.

Proper storage of the DIT is critical. If the document is ever lost a new certificate must be issued from

the LTSA, a process that can take months and several thousand dollars. Any owner pulling the DIT should

take great care to not lose that document.

The following information is provided by a partner law firm I have worked with for many years. If

protecting your mortgage-free interests are of high importance please read the costs associated and

FAQs on the website.

As always, if you require further assistance with this matter or any other financing related questions

please do not hesitate to reach out.

If you are a self-employed client who owns your own business, you may have chosen to set that business up as a corporation. This means the business operates as essentially its own person. They have income through business revenue and expenses from marketing costs, materials, office space, etc.

When it comes to getting a mortgage, there are a few benefits to putting that mortgage under the corporation instead of your individual self:

1. Corporations tend to pay a lower tax rate than the personal income tax rate and only pay taxes on the net business income.
2. When it comes to qualifying for a mortgage, a lender can look at the business income or the personal income they pay themselves.
3. Adding the net business income or the personal income from year 1 and year 2 and dividing it by two is the income a lender will associate with that borrower. Keep in mind though this will also be affected if there is more than one shareholder.

There are two ways one can go about this type of corporate mortgage, depending on if the corporation is the operating company or acts as the holding company.

Mortgages and Operating Companies

As with any mortgage, there are considerations and more-so when looking to put your mortgage under your corporate umbrella. While you would essentially qualify as though you’re buying a property in your name, your application will be packaged much differently to the lender. You would be instead qualifying as a corporation with a personal guarantee from yourself.

It is also possible to do a mortgage deal under your personal name but utilize both personal and corporate income. Lenders can do this by looking at both personal T1 generals and respective NOA, plus you can qualify by looking at the Net Business Income before taxes as seen on company financials.

When it comes to getting a mortgage under an operating company (versus a holding company), you may encounter limitations with the lenders that provide this type of deal. You would be looking at an Alt A (B Lender) to finance this particular mortgage, which may come with higher interest rates.

Mortgages and Holding Companies

When it comes to getting a mortgage under a holding company, you will find things are a bit easier. Having a mortgage under a holding company, versus the operating company, essentially removes any limitations or liability from the operating company with regards to the mortgage.

However, to be eligible, you must meet the definition of a Personal Holding Company (PHC) or Personal Investment Company (PIC) per the bank. This is typically considered “a Canadian incorporated entity established by an individual or individuals for the purpose of conducting investment activities, which can include holding real estate, and/or investments. Personal Holding or Investment Companies, and the owner of the PHC or PIC must qualify personally, and sign as covenantor”.

Some additional reasons to consider a mortgage under a corporation or holding company include:

1. If your intent is to flip properties rather than hold them as rental revenue, it might make sense to consider holding it through a corporation
2. You have retained corporate profit that can be used to buy a property without withdrawing money personally and incurring personal tax.

The most important thing to note when going this route for a mortgage is that ALL DIRECTORS listed on the corporation MUST also be listed on the mortgage application. For a sole proprietorship, this is easy as there is typically only one director, however on larger corporations this is something to consider.

For some individuals, the benefits might not be enough to convince them to put their property under the corporation but for others, it may be the perfect solution.

To find out how your income would be viewed by a lender if you have your business set-up as a corporation, contact Tara Matthews at 778-834-7355