How should I assume the seller’s loan?

The real estate market appears to be on the rebound, but sometimes it seems as if creditors haven’t caught on to that. With the credit market still somewhat stingy, potential buyers may want to consider assuming their sellers’ loans. Not surprisingly, this approach comes with pros and cons.

How it works

Assumed loans are typically securitized, with strict requirements related to the borrower’s structure. The lender will likely require that the buyer/loan assumer’s structure mirror the entity described in the original loan documents. This means you may need to create a single-purpose entity (SPE) to carry out the transaction. If the loan documents require multiple levels of SPEs, you can usually satisfy lenders by forming a single-member limited liability company, with the buyer as the single member.

You must obtain copies of all of the loan documents and closely review the terms and conditions. If you’re confident that you can comply, contact the lender. The lender will provide an information package that, among other things, details the required deliverables and fees.

Once you have the package in hand, complete an assumption application and make the necessary deposits. The lender also may require certain indemnification, as well as formation documents, biographical information on any principals and guarantors, the purchase agreement with the seller, tax data, and financial statements.

Some loan documents include an assumption right that allows the initial borrower to transfer the property and loan to a buyer under specified circumstances. The lender will likely require the payment of a transfer fee (for example, 1% of the loan amount), payment of its legal and administrative expenses, and approval of your financial condition and expertise in real estate management.

Pros and cons

If a seller’s loan documents provide the right to transfer the property and assign the loan, you shouldn’t encounter many hurdles — which will save you time and money. Loan assumptions can also save days and dollars because the process is often quicker than the loan origination process. And the existing loan may have more attractive rates and terms than you could secure in the current marketplace.

But lenders generally have the last word on whether a buyer is qualified to take over a loan. Moreover, in the absence of an explicit assumption right, lenders can change loan terms.

Look before you leap

Before assuming a loan, closely scrutinize the loan provisions, loan assumption agreement provisions and any additional documents the lender requires. Then confirm that any changed loan terms are reflected in the necessary documents.