Assuming an existing loan when you buy a property

When you buy a property that already carries a loan, you may be able to take over that loan instead of replacing it. This is a loan assumption. Done well, it can preserve terms that are no longer available and avoid a costly prepayment on the seller's side. Done poorly, it can stall a closing for months. The difference is usually preparation.

What an assumption is

In an assumption, the buyer steps into the existing loan. The interest rate, amortization, maturity date, and most other terms stay the same. The lender, or its servicer, must approve the new borrower. The seller is usually released from future liability once the transfer closes, although that release is negotiated and not automatic.

Many commercial loans allow an assumption with lender consent. Some prohibit it entirely. The loan documents decide, so the first step is always to read them.

Why buyers and sellers consider it

An assumption makes the most sense when the existing loan is better than what the market offers today, or when paying it off would be expensive.

• Terms worth keeping. A loan written in a different rate environment may carry a coupon or structure a new lender would not match.
• Prepayment costs. Loans with yield maintenance or defeasance can be costly to pay off early. An assumption can avoid that cost for the seller, which can show up in price.
• Fewer moving parts. There is no new appraisal of the full loan amount from a fresh lender and no new rate to lock, although the servicer will still underwrite.

The tradeoff is control. The buyer accepts a loan built for someone else. The maturity date, reserves, covenants, and prepayment terms all come with it.

What the lender reviews

The servicer underwrites the buyer much as a new lender would, with a focus on whether the new owner is at least as strong as the old one. Expect requests for:

• Financial statements and a schedule of real estate owned for the buyer and any guarantors
• Organizational documents for the buying entity
• Resumes or track records for the people running the property
• The purchase contract and a business plan for the asset
• Credit, background, and sometimes liquidity and net worth tests set out in the loan documents

Many loans also require a replacement guarantor to sign the same guarantees the seller's principals signed. Read those carefully. Recourse carve outs and environmental indemnities transfer to the new party.

Costs and timing

Assumptions are rarely free. Common costs include an assumption fee stated in the loan documents, the servicer's legal fees, rating agency or investor review fees on securitized loans, and updated third party reports. Many servicers also require new or larger reserves.

Timing is the bigger risk. A servicer may take several weeks to several months to approve a transfer, especially on securitized loans with layers of review. Build that time into the purchase contract. Tie closing to assumption approval, set a realistic outside date, and agree in advance on who pays fees if the request is denied.

The gap between price and loan balance

An assumed loan has a fixed balance. If the purchase price is well above that balance, the buyer must fill the difference with cash, seller financing, or a second loan. Many first mortgage lenders restrict additional debt, so check before you plan around it. Preferred equity or a mezzanine structure may be possible where the documents allow, but each adds approvals and cost.

Run the numbers both ways. Compare the assumed loan plus gap financing against a fresh loan at today's terms, including every fee and the prepayment cost the seller would otherwise bear.

Start with the loan documents, not the term you want. Confirm whether assumption is allowed, what it costs, and what the servicer will require. Then build the timeline and the gap financing around those facts. The debt sizing tool can help you compare an assumed loan with a new one. If you are weighing an assumption on an acquisition, contact us and we can review the documents and structure with you.