Understanding Assumable Loan in Commercial Real Estate
An assumable loan is a type of loan that the new purchaser of the property can take over. Assumable loans are designed to allow the buyer of the commercial property to take over the loan held by the existing property owner when the property is sold.
There are numerous situations where it is essential to know if a loan is assumable and whether or not this is the ideal type of loan structure to enter into – not only are not all loans assumable, but most have conditions in which the new buyer can assume the loan.
Those purchasing commercial real estate have two options when taking on debt. The first is to obtain new debt through a commercial loan. The second is to assume the existing debt on the property. Some property owners will have pre-negotiated an assumption right into the terms of their commercial loan. That means that when that owner decides to sell, any buyer of the property has the right – but not the obligation – to assume the existing commercial real estate loan.
What Types of Loans Are Assumable?
Many types of commercial real estate loans are assumable loans. This includes some:
Not all loans that fall under these loan types are truly assumable. However, many can be. To determine if a loan is assumable, there is often a notice of the ability to assume the loan on the memorandum.
Advantages of Assumable Commercial Real Estate Loans
Several potential benefits come from assumable commercial mortgage loans.
- It reduces the time spent securing a loan. In some situations, the new buyer can assume the loan and obtain ownership of the property in as few as 30 days, sometimes even sooner than this. By comparison, a traditional commercial loan obtained as a new type of debt could take several months to complete.
- The terms of the assumable loan may meet the specific goals of the borrower. In some situations, the FHA assumable loan may have better terms than what the current loan market could offer. This could include a range of differences, such as a longer-term or a fixed interest rate. Some may offer a lower rate as well.
- It could save the buyer money in some situations. The entire process of assuming a loan is typically faster and more efficient overall than obtaining a new commercial loan. The costs that the lender incurs during this process tend to be significantly lower than in new loans. That saving is passed on to the buyer.
- A reduced down payment may also apply. Down payment requirements may differ in traditional, new loans. The down payment on assumable loans is the difference between the amount of money that is owed on the debt and the sales price of the property. In some situations, if the current owner of the property does not have a significant amount of equity (or the sales price), the down payment may be less than the amount of a down payment on a traditional new commercial loan.
Ultimately, the deal must be considered carefully. In many situations, the current commercial real estate loan could be a better overall deal than what is available otherwise. From a seller’s point of view, being able to offer a better deal like this could help the seller to find more interested buyers for the property, helping to sell the real estate sooner.
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Disadvantages of Assumable Commercial Real Estate Loans
When considering assumable loans, commercial real estate investors must also look for any potential drawbacks of these loans. There are a few potential areas of concern to consider.
- The approval process can take longer in some situations. In some cases, the current loan on the property could be more complicated than what could be accomplished in a new loan. The loan approval process may be stretched out in these situations, which could make it too time-consuming for those who need to move a deal through quickly.
- Not all situations will reveal positive terms. There are some situations in which the terms of the assumable loan are not as favorable as what could be obtained through a new loan, such as due to better current market terms or conditions. This negates the benefit of the assumable loans.
- In some situations, the down payment could be higher. In situations where the existing property owner has a significant amount of equity in the transaction, that can lead to a much larger down payment for the new buyer to assume the loan instead of taking out a new loan.
- Some borrowers may not want to work with the existing loan’s lender. When taking over the debt, the same lender is maintained, and that could be a concern in some situations.
- It is also possible that some buyers may not qualify or meet the specific restrictions set by the original loan. Typically, the lender’s Board has the ability to make a decision on whether or not the new buyer is qualified to take over the loan.
Those who are considering FHA assumable loan options need to factor in the cost and timeline carefully before making the decision to move on to this type of loan. Often, it may be too costly or limited.
It is important for sellers to consider assumable loan limitations. In some situations where these loans are assumable, the owner or investor may face prepayment penalties if the buyer secures a new loan rather than assuming the existing debt. For the seller, this can be a costly process and may yield less beneficial results. This is something the investor should consider before entering into the assumable loan.
How to Assume a Commercial Loan
One of the first factors for borrowers to consider is whether or not the assumable commercial mortgage has restrictive terms. Generally, the lender must approve the new buyer to assume the loan. The lender typically has the right to approve the loan’s transfer.
Lenders will need to determine if the borrower has the qualifications to maintain the loan, often looking at the financial means the borrower has to repay the loan. Sometimes, the lender may believe too much risk exists and may not approve the transfer.
For those who want to move forward with the assumable loan, the first step is to agree to the terms of the debt. Then, borrowers will work with the lender to obtain approval for the transaction. This, along with working with the lender, allows the process to move forward. The buyer may qualify then for the loan and work with an attorney to take over payments on the loan.
Wrapping Things Up
Assumable loans are commonly available, and, in some situations, they could be the ideal tool for purchasing commercial real estate quickly. In some situations, the loan may be assumable for a small fee, such as many HUD multifamily loans as well as CMBS loans.
Borrowers who are considering an FHA assumable loan must take the time to consider if the terms and conditions are the best available for that purchase. If so, and lenders approve, this type of transaction may be ideal.