In commercial real estate, an assumable loan is a financing arrangement that permits a purchaser to take over the existing loan when the property owner decides to sell.

If the seller arranged an assumption option into their loan docs, once they go to sell the property, buyers have the option to assume the existing the loan. Then the existing loan is transferred from the current borrower to the new borrower at the same terms at the time of closing.

In most instances where a loan is assumable, the new borrower or property owner must still secure approval from the lender. The lender's primary objective is to confirm that the borrower possesses the financial capacity to meet the loan's repayment requirements and does not pose a significant financial risk.

Pros of Loan Assumptions

1. Save seller from any prepayment penalty

2. Potentially lower closing costs & fees to the buyer

3. Potentially better terms to the buyer, depending on where the debt market is

For a new buyer to assume an existing loan, the original loan documentation must include an assumption clause. The new borrower must also be approved by the lender, who 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.

Underwriting a Loan Assumption

When underwriting a loan assumption in your model, you will need to replicate the exact loan terms into your model. Loan amount (existing debt amount, interest rate, amortization, etc.

The down payment is equal to the difference between the existing debt and the sales price. If the seller doesn’t have a lot of equity in the deal, the down payment may be lower than the down payment on a new loan.

Conversely, if the owner has a lot of equity in the deal, the down payment may be higher than the down payment of a new loan.

In the NLFM Value Add Model, you don’t have to waste time trying to calculate the exact LTV % of the loan amount you are assuming.

Simply input the existing loan balance into the ‘loan override’ box, and the model will then use that loan amount for calculations.

• Submarkets With Low Inventory Growth Maintaining Rent Increases

• Multifamily Cap Rates in Q3

• 2024 U.S. Apartment Market Forecast

• Rental Market Tracker: Asking Rents Flattened

• Student loan bills resume for 40 million Americans.

• BlackRock Investment Outlook

• 8% mortgage rates are perilously close

• CRE Performance Over the Last 10 Years

📈 Chart of The Week

Rent growth has struggled to gain consistent momentum in 2023 as operators have focused on stabilizing occupancy in lieu of larger rent increases. Rents are up about 2% year-to-date, though normal seasonal trends suggest that the year-end 2023 figure will come in below that 2% figure.

📈 Modeling Your Success,

• Free Multifamily Underwriting Crash Course (free model included)

• Miss Last Week's Newsletter? Read Here

• Private Facebook Community

• Follow NLFM on LinkedIn

👋 Did you enjoy this newsletter? The best compliment would be for you to share this on social media or with a friend.

📈 Professional Underwriting Service

👉 Do you want to outsource your multifamily underwriting work?

We are now accepting a limited number of sponsors to work with on a regular basis.

Why should you outsource your underwriting needs?

• Pay as you need

• Turn key solution

• No need to hire staff

• Reduces your overheads

• Saves an incredible amount of time

• Hire an expert for a fraction of the cost