A loan assumption is a transaction in which a buyer takes over the seller's existing commercial mortgage, inheriting its outstanding balance, interest rate, and remaining term rather than obtaining new financing. The lender must approve the new borrower, and a fee, commonly 1% of the loan balance, usually applies. Assumptions are common on CMBS and agency debt.
How Does a Loan Assumption Work?
A loan assumption works by transferring an existing mortgage from seller to buyer with the lender's consent, leaving the loan's rate, balance, and maturity unchanged. The buyer qualifies through net worth, credit, and property review, pays an assumption fee, and signs an assignment. The seller is typically released from liability once the transfer closes.
Per Commercial Real Estate Loans, CMBS loans are generally fully assumable, and assumptions usually do not require a new appraisal or environmental report, though servicers verify borrower net worth and credit and may order a property condition assessment. The existing note stays in place, so the buyer steps into the seller's rate rather than repricing at current market rates.
Step | What happens |
Application | Buyer submits net worth, credit, and management experience for servicer review |
Underwriting | Servicer verifies the buyer and may order a property condition assessment |
Approval | Lender or CMBS special servicer consents to the transfer |
Fee and closing | Buyer pays the assumption fee, signs the assignment, and takes over the note |
Most commercial notes contain a due-on-sale clause, so a property cannot change hands without either paying off the loan or completing a lender-approved assumption. The assumption is the mechanism that satisfies that clause without retiring the debt.
Why Loan Assumption Matters
A loan assumption matters most when the assumed rate sits below current market rates, because the buyer inherits below-market financing that would be impossible to replicate on a new loan. In a higher-rate environment, an assumable loan at an older, lower coupon becomes a valuable asset that can raise a property's sale price and widen the buyer pool.
Per Freddie Mac and Fannie Mae guidance, agency multifamily loans are assumable with a transfer fee of 1% of the unpaid principal balance, and Freddie Mac assumptions may add a lender underwriting fee, typically around $5,000. That 1% is small relative to the value of locking in a rate one or two points under the market.
The quotable point for an operator: a loan assumption transfers the seller's rate, not just the seller's balance, so its value rises exactly when new financing gets expensive.
Example
A buyer is acquiring a property with a $5,000,000 CMBS loan in place at a 4.5% fixed coupon, five years into a ten-year term. Market rates for a new loan are 6.5%. Assuming the loan preserves the 4.5% rate on the remaining balance, and the servicer charges a 1% assumption fee.
Item | Value |
Assumed loan balance | $5,000,000 |
Assumed coupon | 4.5% |
Current market rate for new loan | 6.5% |
Rate saved | 2.0% |
Assumption fee (1% of balance) | $50,000 |
First-year interest saved (2.0% of $5,000,000) | $100,000 |
The buyer pays a $50,000 assumption fee and, in the first year alone, saves roughly $100,000 in interest versus new financing at 6.5%, a payback of the fee inside six months. Over the remaining five years of the term, the interest saved compounds well past the fee, which is why assumable low-rate debt commands a premium in a high-rate market.
Variations and Edge Cases
Loan assumption terms depend on the loan type and the documents. The table below covers the variants an operator should confirm before pricing an assumption into a deal.
Variant | Treatment |
CMBS assumption | Generally fully assumable; special servicer approval and roughly 1% fee, per Commercial Real Estate Loans |
Agency assumption | Fannie Mae and Freddie Mac charge a 1% transfer fee on unpaid principal balance |
Qualified assumption | Documents pre-approve assumption if the buyer meets stated criteria, speeding approval |
Non-assumable loan | Due-on-sale clause forces payoff at sale; no transfer permitted |
Novation vs release | Confirm the seller is released from liability rather than remaining a guarantor |
The most common mistake is assuming that any low-rate loan can be transferred. Non-assumable loans, and many bank balance-sheet loans, block transfer entirely, forcing a payoff. Confirm assumability, the exact fee, and whether the seller is released before underwriting the benefit.
Loan Assumption vs Refinance
A loan assumption is often confused with a refinance, and both change who or how a property is financed, but they move in opposite directions. A loan assumption keeps the existing loan and its rate and transfers it to a new borrower. A refinance replaces the existing loan with a new one at current market rates and terms.
The practical difference is the rate. An assumption preserves the seller's original coupon, which is valuable when rates have risen since the loan closed. A refinance resets to today's rate, which is preferable only when rates have fallen or when the borrower needs to pull out equity through a cash-out refinance. Which one wins is dictated by the spread between the assumed coupon and current market rates.
Frequently Asked Questions
What is a loan assumption in commercial real estate?A loan assumption in commercial real estate is a transaction where a buyer takes over the seller's existing mortgage, inheriting its balance, interest rate, and remaining term instead of obtaining new financing. The lender must approve the new borrower, and a fee, commonly 1% of the loan balance, usually applies. It is common on CMBS and agency debt.
How much does a loan assumption cost?A loan assumption typically costs about 1% of the loan balance as an assumption or transfer fee. Fannie Mae and Freddie Mac charge 1% of the unpaid principal balance, and Freddie Mac may add a lender underwriting fee of roughly $5,000. CMBS assumption fees are also generally around 1%, per Commercial Real Estate Loans.
Are CMBS loans assumable?Yes. CMBS loans are generally fully assumable with special servicer approval. Assumptions usually do not require a new appraisal or environmental report, but the servicer verifies the buyer's net worth and credit and may order a property condition assessment. A fee of roughly 1% of the loan balance typically applies.
When is a loan assumption worth it?A loan assumption is worth it when the assumed rate sits below current market rates. Inheriting a below-market coupon saves interest that a new loan cannot match, and that saving can quickly exceed the roughly 1% assumption fee. In a high-rate market, an assumable low-rate loan can raise a property's sale price.
Related Terms
CMBS Loan
Permanent Loan
Loan to Value Ratio
Debt Service Coverage Ratio
Defeasance