Assuming a Fannie Mae Multi Family Loan

[Anson K Au]

Hi all. I'm currently underwriting a multi family property. The current owner is looking for someone to assume his loan which matures at 2027. He has been making interest only payments since 2017. Fannie Mae is also offering a supplemental loan at a slightly higher interest rate of the original mortgage.  

What should I be aware of in this type of situations? What questions should I be asking?

[Mitch Provost]

@Anson K Au, I/O payments are usually 2-5 years. I'd check that to see when principal payments will begin. That will change your DSCR, thus your expense ratio and returns.

Most sellers want to have their loan assumed when there is a prepayment penalty (so they don't have to pay it). The benefit of assumption for them is that there is no penalty since the debt will continue to be serviced. Your benefit is potentially getting a loan at better than available terms (check with lenders). If the terms are not better than currently available, you would be better to get a new loan. You would have to qualify for an assumption as if you were making the loan yourself.

I'm guessing that Fannie Mae is offering supplemental because LTV of the primary loan is low and there is room for more leverage. If LTV is low based on the current loan value, you would either need to make up the difference from the current loan amount to the sale price with either all cash or the supplemental loan plus cash.

If you're able to come up with a large cash investment, you won't need the supplemental, but your returns (and risk) will be slightly lower due to the large amount of equity.