Assumable Financing Question
Starting to see a lot of deals with assumable long term financing which is obviously a huge selling point in the interest rate market. Came across one was 3.25% I/O for the next 7 years , Which provided an excellent cash on cash return (yay?). But based on the list price alone, it would put the loan at 85% LTV. Isn't this a huge red flag for the bank when they see the property trade at 85% LTV to the new owner? I'd imagine they desperately want to call these loans back and reissue at current interest rates. This would certainly trigger any sort of LTV covenant if the bank is paying any attention at all. Can any Lenders shed light on this? Any protections we can put in the PSA to mitigate LTV triggers on assumable financing?
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Some of the assumable mortgage language allows for a partial pay down of the loan to get to the right LTV. So you have an 85mm loan, buy at 100mm, which includes a pay down of 20mm on the loan so the loan is now "right sized."
Be careful here though because while loans can be assumable, it is usually a one time right. So if you do the paydown and want to liquidate or refinance before the end of the term, you will probably have to pay the prepayment penalty.
Before you sign a PSA, make sure to read the language in the docs themselves. Don't rely on the seller to be correct in their description of the documents
Thank you this makes a ton of sense. The "all-in cost" after pay down of loan will be much higher, ex. would need $35m in equity instead of $15m in equity to close in your scenario (which will make the CoC return look much more "normal")
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