Loan Assumptions in Real Estate Transactions: Benefits, Restrictions, Strategies, and Risks

As interest rates remain high, one option for investors seeking financing for real estate acquisitions is a loan assumption. A loan assumption occurs when a real estate buyer purchases a property and takes over a seller's existing mortgage loan through the lender. Many types of commercial loans can be assumed, including most Fannie Mae, Freddie Mac, HUD multifamily, and commercial mortgage-backed securities.

A loan assumption has many benefits for the seller and buyer. The seller can exit the loan earlier, avoid prepayment penalties or premiums, and in some cases, also avoid deadlines for repairs and other items that the seller is unable to meet. For the buyer, a loan assumption may include lower interest rates than the current market rates, reduced closing costs as compared to a newly originated loan, and the buyer is given a clear understanding of the expectations under the loan as the terms will likely remain the same after the assumption.

One downside for the buyer is payment of an assumption fee which usually falls between 0.5 to 1.0 percent of the original loan amount. Another drawback is the extensive and rigid financial evaluation process by the lender to confirm that the buyer is a solid candidate and worth the lender foregoing the considerable fees associated with originating a new loan as opposed to approving an assumption.

For lenders, the processing of loan assumptions involves many of the same regulatory considerations as originating a new loan. However, because of the varying requirements under agency and investor guidelines, there are several unique aspects to processing assumptions that may pose challenges to servicers that do not regularly engage in mortgage origination.

Listen as our authoritative panel discusses the opportunities and challenges with loan assumptions versus seller financing and provides tips for negotiating specific terms into the purchase and sale agreement and related lender approval documents to ensure adequate diligence of the loan documents before closing.