An assumable mortgage is a type of financing arrangement whereby an outstanding mortgage and its terms are transferred from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid obtaining their own mortgage. Different types of loans can qualify as assumable mortgages, though there are some special considerations to keep in mind.
An assumable mortgage allows someone to find a house they want to buy and take over the seller’s existing home loan without applying for a new mortgage. This means the remaining balance, mortgage interest rate, repayment period, and other loan terms stay the same, but the responsibility for the debt is transferred to the buyer.
Understanding Assumable Mortgages
In commercial real estate, an assumable loan is a loan that can be taken over by a buyer when the owner of the property sells. Determining whether or not a loan is assumable (and under what conditions it can be assumed by a new buyer) can be very important. Otherwise, an owner/investor could face significant prepayment penalties if they need to pay off the loan in order to sell the property.
In most cases, if a loan is assumable, the new borrower/owner will still have to be approved by the lender. The lender needs to ensure the borrower has the financial means to repay the loan, and that they aren’t going to be a serious financial risk. For some kinds of loans, such as HUD multifamily loans, having a new buyer assume a loan requires a small fee of between 0.05% and 1% of the original loan amount. In many situations, CMBS loans are also assumable for a small fee.
What are the Benefits of Assumable Loans?
If a property has an assumable loan, it may be easier to sell, because it is far easier for a new borrower to assume a current loan rather than to take out new financing altogether. This makes assumable loans a benefit for both the seller and the potential buyer of the commercial property. Assumable loans are particularly ideal when:
- There is still a long-term (and high leverage) left on the loan.
- The loan is at an equal or lower fixed interest rate than the current market interest rates.
- The loan allows supplemental financing to increase leverage for the new borrower.
In an environment of high (or rising) interest rates, a fixed-rate loan set at a lower interest rate will allow a borrower to get lower-rate financing than they could anywhere else. Most lenders set loan assumption fees at around 1%, which is relatively affordable.
The main benefit of an assumable loan in commercial real estate is that it allows the seller to avoid prepayment penalties. This can be especially beneficial if the loan has a high-interest rate or if the seller needs to sell the property quickly. Additionally, assumable loans can be beneficial for buyers, as they can take over the loan at the same interest rate as the original borrower, potentially saving them money in the long run.
For some kinds of loans, such as HUD multifamily loans and CMBS loans, having a new buyer assume a loan requires a small fee of between 0.05% and 1% of the original loan amount.
In general, loan assumption is cheaper for the new borrower because they will not need to pay high lender fees and acquire third-party reports such as an environmental assessment, engineering report, and zoning report. In most cases, only an appraisal and a physical needs assessment (PNA) will be required. Because of this, deals involving assumable loans can often close much more quickly than those in which a buyer needs to get original financing from a lender.
What are the risks associated with assumable loans in commercial real estate?
The main risk associated with assumable loans in commercial real estate is that the new borrower/owner may not be approved by the lender. The lender needs to ensure the borrower has the financial means to repay the loan, and that they aren’t going to be a serious financial risk. Additionally, for some kinds of loans, such as HUD multifamily loans, having a new buyer assume a loan requires a small fee of between 0.05% and 1% of the original loan amount. In many situations, CMBS loans are also assumable for a small fee.
What are the requirements for assuming a loan in commercial real estate?
In most cases, if a loan is assumable, the new borrower/owner will still have to be approved by the lender. The lender needs to ensure the borrower has the financial means to repay the loan, and that they aren’t going to be a serious financial risk. For some kinds of loans, such as HUD multifamily loans, having a new buyer assume a loan requires a small fee of between 0.05% and 1% of the original loan amount. In many situations, CMBS loans are also assumable for a small fee.
Qualifying for a commercial real estate loan is a more rigorous process than applying for a residential loan. You’ll need:
- A detailed business plan,
- The plans you have for the property,
- 3-5 years of financial documents (business and personal),
- Your personal credit history.
CONCLUSION
An advantage of having an assumable loan is that it can serve as an incentive for commercial property investors, especially if the existing interest rate is low and the terms are particularly good. This can be used as an added selling point if you encounter a buyer who’s willing to make a significant cash contribution.
A loan assumption might also make sense after any major event that requires the transfer of property. This can include divorces, estate planning, and inheritances, gifts of real estate, or other non-arms length transactions. You may wish to consult an attorney to confirm whether an assumption would be permitted in any of these scenarios.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
