I am in need of advice on assumable mortgages. The property I am looking at is worth the current loan balance. The loan is assumable and is due in full in 3 years.
My question is: What are the criteria for a bank approving the transfer of an assumable loan? Is re-qualifying either personally or for the property necessary to transfer the loan?
Thank you for your time
Hi,
When you tell me the property your looking at is worth the current loan balance my very first question is what happened to the 25% plus equity / down payment that would have been required when this loan was written? Is this property mis-managed and distressed? What's wrong with it and what does it cost to mitigate the problem? Could you turn it around in 3 years?
Do you understand that to seek a new loan in 3 years the property will need 25% equity minimum or cash out of your pocket?
A commercial loan is different than a residential loan as there are no income requirements on you, what the lender is looking for is your experience to over-manage / manage rental real estate (Track Record) and reviews your credit to insure you pay your bills as agreed, are stable and don’t have a habit or known financial distress!
Look at the existing loan documents (From Seller) and see whether they indicate anywhere terms and conditions for assumption (This may be in documents by the lender in preliminary documents furnished before this owners closing), the criteria will be different lender to lender, if not there you will have to call the lender and talk to someone in the commercial loans department.
Requalifying may be necessary as the lender will still want to know your qualified to manage and turn around the property!
GR
Hi Gold River,
Thank you for your time.
The reason for the decrease in value is twofold:
- Cap rates have increased in my city over the last 4 years. This property was valued at a 6% Cap in 2005 and is 9% now.
- The NOI is 10% lower then it was in 2005 due to higher vacancies. Some of those higher vacancies are due to softer rental market (people sharing rather then renting by themselves) and some is due to mismanagement. It looks like there is some delayed maintanenace, but not a huge amount.
If I could assume this with very little cash, my plan will be to invest my ‘downpayment’ in the property so that we are positioned to attract new tenants now and take advantage of rental increases as the market improves.
One key to refinancing in 3 years will be cap rates. If they hold where they are today or improve then I would be able to generate enough to support a 25% DP. If they continue to degrade, then it will be difficult to make that up. I believe that cap rates will not continue to degrade over the next 3 years. I actual expect them to improve, but am assuming flat.
My personal credit is excellent and my track record for managing profitable properties is also strong. But this is 3-4x larger then what I have done before so it is still a stretch. This deal is appealing in part due to the attractive financing relative to what is available for new loans right now. Being able to assume this loan is critical to the appeal.
Do banks allow assumption of loans with selling price nearly 100% of loan value? Or do they require the new owner to pay the balance down to ensure 75% LTV?
Dana