Loan Assumability
When buying a property encumbered by a loan, you may be able to assume the existing financing instead of taking a new mortgage for the acquisition.
What Is Loan Assumption?
In many commercial real estate loan contracts, there is a provision known as an assumability clause. An assumability clause allows the initial loan held by the seller of a commercial asset to be taken over, or “assumed,” by the buyer, rather than the buyer having to obtain new financing. Even though the loan is to be assumed by the new party, the buyer is still required to meet strict eligibility requirements, allowing lenders to ensure that the new borrower isn’t a financial risk and has the means to make the payments on the loan note.
Loan assumption isn’t always an available option for commercial borrowers, but most Fannie Mae, Freddie Mac, HUD multifamily, and CMBS loans are assumable. In some rare cases, bank and life company loans may include assumability clauses, but this isn’t a standard practice, and it greatly depends on the lender.
Loan Assumability in Self Storage
Loan assumption almost always comes with an attached fee. HUD multifamily loans, for example, are assumable with a fee typically between 0.05% and 1% of the original loan amount. CMBS financing — which can be utilized to acquire a self-storage facility — allows loan assumption as a way for borrowers to avoid strict prepayment penalties attached to CMBS loans with a standard 1% assumption fee.
The Advantages of an Assumable Loan
Lower Interest Rates. In case the assumable loan has lower interest rates compared to the current mortgage rates in the market, the buyer can save money on the investment.
Lower Closing Fees. This can save money both for the buyer and the seller.
Good Marketing Strategy. Assumable loans can be highly attractive, especially in a higher interest rate environment, making it easier for the seller to find a buyer willing to pay the asking price or even above that.
Strict eligibility requirements. Lenders will usually only sell their property through assumption if the buyer meets the lender’s credit and income requirements to ensure that the buyer is not a financial risk.
High downpayment. If a home is valued higher than the mortgage remaining on the asset, the buyer may need to pay a large amount of cash or take out a second mortgage.
What is loan assumability?
Assumability is the ability to transfer an existing mortgage and all terms from the current borrower to a buyer. In many cases, this keeps the new buyer from needing to obtaining a new mortgage, though they are free to do so if they desire. While all HUD multifamily loans, including HUD 221(d)(4) loans, HUD 223(f) loans, HUD 232 loans, and HUD 223(a)(7) loans are fully assumable, the FHA requires prior approval along with a 0.05% fee of the original loan amount.
What are the benefits of loan assumability?
The benefits of loan assumability for HUD 223(f) loan borrowers include the ability to make their property significantly more marketable, especially in an environment where interest rates are rising. This is because a new borrower would not be able to get loan with a comparable interest rate on the open market, and could save a significant amount of money as a result of the loan assumption.
For more information, please see Are HUD 223(f) Loans Assumable? and HUD 223(f) Loan Facts.
What are the risks associated with loan assumability?
The risks associated with loan assumability depend on the type of loan being assumed. Generally, the buyer must meet strict borrower requirements in order to be eligible for the loan assumption — after all, lenders must ensure the new borrower has the financial means to continue repaying the loan and that they aren't a financial risk. In many cases where loan assumption is allowed, like with HUD multifamily loans, a buyer must pay a fee — typically between 0.05% and 1% of the original loan amount to assume the loan. CMBS financing sometimes allows loan assumption as a means of avoiding strict prepayment penalties associated with conduit loans, generally along with a standard 1% assumption fee as well.
What types of loans are assumable?
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.
How does loan assumability work?
Loan assumability is the ability to transfer an existing mortgage and all terms from the current borrower to a buyer. All HUD multifamily loans, including HUD 221(d)(4) loans, HUD 223(f) loans, HUD 232 loans, and HUD 223(a)(7) loans are fully assumable, however the FHA requires prior approval along with a 0.05% fee of the original loan amount. Source 1 and Source 2.
Are there any restrictions on loan assumability?
Yes, there are restrictions on loan assumability. In the case of HUD 223(f) loans, they are fully assumable with lender approval and a 0.05% fee. However, the new borrower must meet the lender's credit and income requirements. Additionally, the lender may require the new borrower to pay a fee to cover the cost of processing the loan assumption. For more information, please visit Are HUD 223(f) Loans Assumable?