Loan Assumptions and Multifamily Acquisitions

Maricela Soberanes Thursday December 15th, 2022

NEW DEBT VS LOAN ASSUMPTION

Lately we have seen more and more Multifamily (MF) for sale with loan assumption as an option.

We also have been presented with MF leads with loan assumptions not underwriting all aspects of a loan assumption. So here we take a deep dive on loan assumption and what that means to you when considering assuming debt on a MF acquisition.

A loan assumption can be a useful tool for a prospective buyer of a multifamily property. In a loan assumption, the buyer takes over the seller’s existing mortgage, rather than applying for a new loan. This can be beneficial for both the buyer and the seller in certain circumstances.

First, let’s define what a loan assumption is and how it works. When a buyer assumes a seller’s loan, they agree to take on all of the seller’s outstanding mortgage debt. This means that the buyer is responsible for making all future mortgage payments, including any interest and principal payments. The seller is no longer responsible for the mortgage and is released from any future obligations under the loan.

There are a few key benefits to a loan assumption for the buyer of a multifamily property. The most obvious benefit is that the buyer can potentially save a significant amount of money on closing costs and other fees associated with obtaining a new mortgage.

This is because the buyer does not have to go through the process of applying for a new loan, which can be time-consuming and expensive.

Another potential benefit of a loan assumption is that the buyer can potentially obtain more favorable loan terms. If the seller’s existing mortgage has a lower interest rate than what is currently available on the market, the buyer can save money on their monthly mortgage payments. 

Additionally, if the seller’s loan has a longer term than what is currently available, the buyer may be able to obtain a longer repayment period, which can help to make their monthly payments more manageable.

There are also potential benefits for the seller of a multifamily property when they offer a loan assumption to a buyer. For one, it can make their property more attractive to potential buyers, as it provides an added incentive for a buyer to choose their property over others on the market. Additionally, the seller may be able to negotiate a higher sales price if they offer a loan assumption, as the buyer may be willing to pay more for the property if they are able to obtain a more favorable loan.

Of course, there are also potential drawbacks to a loan assumption for both the buyer and the seller. For the buyer, the main concern is the risk of assuming the seller’s existing mortgage. If the seller has a loan with a high interest rate or unfavorable terms, the buyer could end up paying more than they would have if they had obtained a new loan on their own. Additionally, the buyer will be responsible for any late payments or default on the loan that occurred before they assumed the mortgage.

For the seller, the main concern with a loan assumption is that they may not be able to obtain as much money from the sale of their property as they would have if they had sold the property without offering a loan assumption. Additionally, the seller may be required to pay a fee to the lender in order to release them from the mortgage, which can eat into their profits from the sale.

Overall, a loan assumption can be a useful tool for both the buyer and the seller of a multifamily property in certain circumstances. It can provide the buyer with the opportunity to save money on closing costs and potentially obtain more favorable loan terms, while providing the seller with the opportunity to negotiate a higher sales price. However, it is important for both parties to carefully consider the potential risks and drawbacks before entering into a loan assumption agreement.

Some potential pros of loan assumptions include:

  • The buyer may be able to obtain a loan with more favorable terms, such as a lower interest rate, than they could get on their own.
  • The seller may be able to avoid the hassle and expense of paying off their existing loan and securing a new one.
  • Both parties may be able to save time and money on closing costs and other fees associated with taking out a new loan.

However, there are also some potential cons to consider:

  • Not all lenders allow loan assumptions, so it may not be an option in every case.
  • The buyer may need to pay a fee to assume the loan, which could add to the overall cost of the transaction.
  • The seller may be required to provide the buyer with a written disclosure statement outlining the terms of the loan, any late payments, and any other issues that could affect the buyer’s decision to assume the loan.
  • If the loan has a prepayment penalty, the seller may be required to pay this penalty before the loan can be assumed by the buyer.

Overall, whether or not a loan assumption is a good option will depend on the specific circumstances of the transaction and the parties involved. It’s important to carefully consider all of the pros and cons before making a decision.

Here are some questions you can ask when considering a loan assumption.

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Happy investing!

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