What Is a Commercial Loan Assumption and How Does It Work?
A commercial loan assumption is a transaction in which a new borrower takes over the rights and obligations of an existing commercial mortgage, keeping the original loan terms, interest rate, and remaining balance intact. Rather than the seller paying off the loan and the buyer obtaining new financing, the buyer "assumes" the existing debt. This is one of the most powerful strategies in commercial real estate for preserving favorable financing during a property sale.
Understanding the commercial loan assumption process has become critically important in 2025 and 2026, with rates significantly higher than the historically low rates locked in during 2020 and 2021. Assuming a below-market-rate loan can save hundreds of thousands of dollars over the remaining term. Whether you are purchasing a property financed by a conduit (CMBS) loan or exploring acquisition financing, knowing when and how to assume a commercial loan gives you a substantial competitive advantage.
Commercial Loan Assumption: Key Numbers
0.5-1%
Typical Assumption Fee
45-90 Days
Average Processing Time
$30K-$100K+
CMBS Assumption Fee
1-3%
Potential Rate Savings
The mechanics are straightforward: the seller requests permission from the lender or servicer to transfer the loan to the buyer. The lender evaluates the buyer's qualifications, creditworthiness, and property management ability. If approved, the loan transfers with its original terms and the seller is released from liability.
Which Commercial Loan Types Are Assumable?
Most securitized and government-backed commercial loans are assumable by design, while portfolio and bank-held loans are generally not assumable unless the lender agrees on a case-by-case basis. Understanding which loan types carry assumption provisions helps you identify opportunities and structure acquisitions more effectively.
Assumable Loan Types in Commercial Real Estate
| Loan Type | Assumable? | Assumption Fee | Typical Timeline |
|---|---|---|---|
| CMBS / Conduit | Yes, standard provision | 0.5-1% + legal costs | 60-90 days |
| HUD / FHA Multifamily | Yes, with HUD approval | 0.05% application + legal | 90-120 days |
| Fannie Mae DUS | Yes, with lender approval | 0.5-1% of loan balance | 60-90 days |
| Freddie Mac Optigo | Yes, with lender approval | 0.5-1% of loan balance | 60-90 days |
| Bank Portfolio Loans | Rarely, case by case | Negotiable | 30-60 days |
| Life Insurance Co. | Sometimes, with approval | 0.5-1% of loan balance | 45-75 days |
| SBA 504 Loans | Yes, with CDC approval | Varies by CDC | 60-90 days |
CMBS (Conduit) Loans are the most commonly assumed. Virtually all CMBS conduit loans include assumption provisions as standard. Because prepayment is restricted through yield maintenance and defeasance, assumption provides the practical exit for sellers. The master servicer or special servicer reviews and approves all requests.
HUD/FHA Multifamily Loans are fully assumable with HUD approval. These carry the longest terms (35-40 years) and lowest rates in commercial lending. The timeline is longer (90-120 days), but assuming a HUD loan at a sub-4% rate represents enormous value in the current market.
Agency Loans (Fannie Mae DUS and Freddie Mac Optigo) are assumable with the servicing lender's approval. The DUS lender evaluates the new borrower using origination-level criteria.
Life Insurance Company Loans may or may not be assumable depending on specific loan documents. Always review the agreement before planning around assumption.
Bank Portfolio Loans are typically not assumable due to due-on-sale clauses, though some community banks will negotiate case by case.
Why Would a Buyer Assume a Commercial Loan Instead of Getting New Financing?
The primary reason buyers assume commercial loans is to capture a below-market interest rate that would be impossible to obtain through new financing, resulting in significant cash flow improvements and enhanced property value. In today's rate environment, this advantage can be substantial.
Loan Assumption vs New Financing
Loan Assumption
- Keep existing below-market rate
- Lower closing costs typically
- No new appraisal in some cases
- Avoid prepayment penalties
- Must meet lender qualifications
- Limited to existing loan terms
- Lengthy approval process
- Cannot adjust loan amount
New Financing
- Choose your own loan terms
- Set your preferred loan amount
- More lender options available
- Faster process in some cases
- Current market rates apply
- Full origination costs
- New appraisal required
- Seller faces prepayment penalty
Refinance After Assumption
- Immediate rate lock benefit
- Later flexibility to adjust
- Can add supplemental debt
- Two sets of closing costs
- Timing risk on rate changes
- Must qualify twice
Supplemental Loan + Assumption
- Keep existing low rate
- Access additional equity
- Single closing possible
- Higher blended rate
- Additional underwriting
- Not available on all loan types
Consider a practical example. A property carries an existing CMBS loan at 4.25% originated in 2021. Current market rates for comparable conduit loans sit around 6.75%. On an $8 million balance, annual savings equal approximately $200,000, or $1 million over five years.
Rate Savings Example: $8M Loan Assumption
4.25%
Existing Loan Rate
6.75%
Current Market Rate
$200,000
Annual Interest Savings
$1,000,000
Savings Over 5 Years
Beyond rate savings, closing costs on an assumed loan are frequently lower. Assumption fees of 0.5% to 1% compare favorably to 1% to 2% origination costs for new loans. Use our commercial mortgage calculator to compare scenarios.
The assumption timeline of 45-90 days runs concurrently with other due diligence, making it comparable to securing new financing, particularly versus refinance transactions. Buyers also avoid rate lock expiration risk and credit market disruptions that can derail closings.
How Does the Commercial Loan Assumption Process Work Step by Step?
The assumption process follows a structured sequence that typically spans 45 to 120 days from initial application to closing, depending on loan type and servicer responsiveness. Planning for this timeline and understanding each phase prevents costly delays.
Phase 1: Pre-Application (Weeks 1-2). Review the existing loan documents to confirm assumability and engage experienced legal counsel. The buyer begins assembling required financial documentation.
Phase 2: Application Submission (Weeks 2-4). The buyer completes a formal assumption application with personal and entity financial statements, tax returns (2-3 years), current rent roll, operating statements, real estate experience resume, organizational documents, and the purchase and sale agreement. The application fee is often non-refundable.
Phase 3: Underwriting Review (Weeks 4-8). The servicer conducts full underwriting of the new borrower, including a credit analysis using the DSCR calculator methodology, net worth and liquidity verification, background investigation, and experience review. For CMBS loans, a rating agency confirmation (RAC) may also be required.
Phase 4: Third-Party Reports (Concurrent, Weeks 4-7). New reports may be ordered at the buyer's expense, including an updated appraisal, Phase I environmental assessment, and property condition assessment. Some servicers accept recent original reports, reducing costs.
Phase 5: Legal Documentation (Weeks 8-10). Legal counsel for both sides draft and negotiate the assumption agreement, transferring all loan obligations from seller to buyer. The servicer's counsel prepares modifications to existing loan documents.
Phase 6: Closing and Transfer (Weeks 10-12). All parties execute assumption documents, the buyer funds escrow deposits and reserves, and the servicer updates records. The seller receives a formal release from loan obligations.
Ready to evaluate whether assuming an existing loan makes sense for your next acquisition? Contact our commercial lending team for a free consultation and assumption feasibility analysis.
What Does a Commercial Loan Assumption Cost?
Total assumption costs typically range from $60,000 to $160,000 on a $10 million CMBS loan, making it substantially cheaper than defeasance or yield maintenance penalties the seller would otherwise face, and often cheaper than the origination costs of a new loan for the buyer.
CMBS Loan Assumption Cost Breakdown
| Cost Component | Typical Range | Notes |
|---|---|---|
| Assumption Fee to Servicer | $25,000-$50,000 | Flat fee or % of UPB |
| Legal Fees (Buyer) | $15,000-$30,000 | Borrower counsel |
| Legal Fees (Servicer) | $10,000-$25,000 | Paid by buyer |
| Rating Agency Fee | $10,000-$25,000 | If rating confirmation needed |
| Third-Party Reports | $5,000-$15,000 | Appraisal, environmental, PCA |
| Title and Recording | $3,000-$10,000 | Varies by state |
| Lender Processing | $2,500-$5,000 | Administrative costs |
| Total Estimated Range | $70,500-$160,000 | On a $10M loan example |
The assumption fee charged by the lender or servicer is the most predictable cost, usually 0.5-1% of the unpaid principal balance or a flat fee. For CMBS loans, this fee is specified in the Pooling and Servicing Agreement (PSA).
Legal fees represent the second largest expense. The buyer typically pays for both their own counsel ($15,000 to $30,000) and the servicer's counsel ($10,000 to $25,000). Third-party reports add $5,000 to $15,000, while title insurance and recording fees add $3,000 to $10,000. For CMBS loans, a rating agency confirmation fee of $10,000 to $25,000 may also apply.
When Assumption Savings Are Largest
The financial benefit of a commercial loan assumption is greatest when the existing loan rate is 2%+ below current market rates. On a $5 million loan, a 2% rate difference equals $100,000 per year in interest savings, easily justifying $50,000-$80,000 in assumption costs.
How Does a CMBS Loan Assumption Differ from Other Loan Assumptions?
CMBS loan assumptions involve a unique layer of complexity because the loan has been pooled with other loans and sold as bonds to investors, meaning the servicer must protect bondholder interests in addition to standard underwriting criteria.
The CMBS assumption process is governed by the Pooling and Servicing Agreement (PSA), which dictates the assumption fee, required borrower qualifications, whether a rating agency confirmation is needed, and the timeline for servicer response. The master servicer handles assumptions for performing loans, while the special servicer takes over for defaulted or distressed loans at higher cost.
Rating agency confirmation (RAC) is a distinguishing feature of CMBS assumptions. The servicer may request that Fitch, Moody's, KBRA, or S&P confirm the assumption will not downgrade the bonds. Some PSAs allow the servicer to waive this requirement if the new borrower meets specified financial thresholds.
CMBS loans also require the assuming borrower to form a single-purpose entity (SPE) with independent directors, separateness covenants, and restrictions on additional indebtedness.
Assumption vs Defeasance: Cost Comparison on $10M CMBS Loan
| Factor | Assumption | Defeasance |
|---|---|---|
| Lender/Servicer Fee | $25,000-$50,000 | $50,000-$100,000 |
| Legal Costs | $25,000-$55,000 | $15,000-$30,000 |
| Securities Purchase | $0 | $500,000-$2,000,000+ |
| Rating Agency | $10,000-$25,000 | $10,000-$25,000 |
| Total Cost Range | $60,000-$130,000 | $575,000-$2,155,000 |
| Who Pays | Buyer (mostly) | Seller |
| Best When | Buyer wants low rate | Seller needs to sell, no buyer assumption |
Despite the added complexity, CMBS assumptions remain among the most common in commercial real estate because the steep prepayment penalties (yield maintenance or defeasance) make assumption the most cost-effective transfer mechanism for both buyers and sellers.
What Qualifications Must a New Borrower Meet to Assume a Commercial Loan?
New borrowers must demonstrate financial strength, real estate management experience, and creditworthiness that meets or exceeds the standards applied to the original borrower, with specific requirements varying by loan type and lender. Falling short on any major qualification criterion will result in denial.
Borrower Qualification Requirements for Assumption
| Requirement | CMBS Standard | Agency Standard | HUD/FHA Standard |
|---|---|---|---|
| Net Worth | Equal to loan amount | Equal to loan amount | Equal to loan amount |
| Liquidity | 5-10% of loan balance | 9-12 months debt service | 6-12 months debt service |
| Credit Score | 660+ minimum | 680+ preferred | No set minimum |
| Experience | Similar asset management | 3+ years multifamily | Previous HUD experience preferred |
| Entity Structure | Single-purpose entity (SPE) | SPE or LLC | Single-asset mortgagor |
| Background Check | Full background and credit | Full background and credit | Previous Participation Review |
Net Worth Requirements are the first hurdle. Most approvals require the new borrower to have net worth equal to or greater than the outstanding loan balance. For an $8 million loan, this means at least $8 million in net worth.
Liquidity Requirements ensure sufficient cash reserves. Agency lenders typically require 9 to 12 months of debt service in liquid assets. CMBS servicers require 5% to 10% of loan balance. HUD requires 6 to 12 months of debt service in reserves.
Credit and Background Standards include a minimum credit score of 660 for CMBS (680+ for agency), plus investigation of criminal history, bankruptcy filings, prior defaults, litigation, and OFAC screening.
Experience Requirements ensure the borrower can operate the property. Servicers want a track record managing similar property types. First-time investors can sometimes satisfy this by engaging an approved property management company.
When Does a Loan Assumption Benefit the Seller?
The seller benefits most from a loan assumption when the existing loan carries substantial prepayment penalties that would otherwise reduce sale proceeds, making the property more marketable and the net transaction more profitable.
Prepayment Penalty Costs Avoided via Assumption ($5M Loan)
Yield Maintenance
500,000
Defeasance
400,000
Step-Down (5-4-3-2-1%)
150,000
Assumption Cost
75,000
Prepayment penalties on commercial loans can be extremely expensive. Yield maintenance, which requires the borrower to compensate the lender for lost interest income over the remaining loan term, can cost hundreds of thousands or even millions of dollars depending on the rate differential and remaining term. Defeasance, which requires the borrower to purchase a portfolio of U.S. Treasury securities that replicate the loan's remaining cash flows, carries similar costs plus significant administrative and legal fees.
By facilitating a loan assumption instead of paying off the loan, the seller avoids these penalties entirely. The buyer assumes the loan at the existing rate and terms, and no prepayment event occurs. This can save the seller $200,000 to $2,000,000+ on a typical commercial mortgage, depending on the loan size, rate, and remaining term.
Additionally, a property marketed with an assumable below-market-rate loan becomes more attractive to buyers, potentially commanding a higher sale price. Buyers are willing to pay a premium for a property that comes with locked-in favorable financing, especially when current market rates are significantly higher. This rate differential effectively gets "priced in" to the property value, benefiting the seller.
Sellers also benefit from smoother transactions. Because the buyer is not subject to the uncertainties of new loan approval, interest rate fluctuations, or credit market disruptions, assumption-based transactions tend to close more reliably than deals contingent on new financing.
Can You Get Additional Financing When Assuming a Commercial Loan?
Yes, several supplemental financing options are available to bridge the gap between the assumed loan balance and the total acquisition cost, though each comes with specific constraints and approval requirements that must be coordinated with the assumption.
Supplemental Financing Options with Assumed Loans
Agency Supplemental Loan
- Fixed rate available
- Co-terminus with first loan
- Same servicer streamlines process
- Combined LTV limits apply
- Combined DSCR must qualify
- Not available year one
Mezzanine Debt
- Higher total leverage
- Fewer restrictions than supplemental
- Available on most loan types
- Higher interest rate 10-14%
- Intercreditor agreement needed
- Shorter term typically
Preferred Equity
- Does not trigger loan default
- Flexible structuring options
- No intercreditor needed
- Most expensive capital layer
- Equity dilution concerns
- Complex legal documentation
For example, if a property sells for $12 million and the assumable loan balance is $7 million, the buyer needs $5 million through equity, supplemental debt, or a combination.
Agency Supplemental Loans are available on Fannie Mae and Freddie Mac assumed loans. These second-position loans offer fixed rates co-terminus with the assumed first mortgage. Combined LTV and DSCR must meet agency standards. Typically not available during the first 12 months after assumption.
Mezzanine Debt can be layered behind an assumed first mortgage at rates of 10% to 14%. An intercreditor agreement with the first mortgage servicer is required.
Preferred Equity does not technically constitute debt and may not trigger restrictions in the assumed loan documents. While more expensive, it can be structured to avoid conflicts with existing loan covenants.
For any supplemental financing, review the assumed loan documents for restrictions on additional indebtedness or equity pledges. Violations could constitute a default.
Need help structuring a loan assumption with supplemental financing? Reach out to our team for a customized capital stack analysis.
What Are the Biggest Risks and Pitfalls of Commercial Loan Assumptions?
The greatest risk in a commercial loan assumption is having the assumption denied after you have committed to the purchase, potentially leaving you obligated to close without favorable financing or forfeiting your earnest money deposit. Careful planning and realistic expectations mitigate this risk significantly.
Critical Assumption Pitfall
Never waive your inspection contingency before receiving preliminary assumption approval from the servicer or lender. If the assumption is denied after you have closed on the property, you may be forced to refinance at unfavorable terms or default on the existing loan. Build 90-120 days of assumption processing time into your purchase contract.
Denial Risk is real. Even well-qualified borrowers face denials due to PSA technicalities or rating agency objections. Include an assumption contingency in your purchase agreement allowing termination if the assumption is not approved within a specified timeframe.
Timeline Risk is common. Processing frequently takes longer than expected, particularly for CMBS loans. Build 90 to 120 days into your purchase contract with extension provisions.
Cost Overruns can erode assumption benefits. Budget conservatively and request detailed estimates from the servicer before committing.
Existing Loan Issues may surface. The buyer inherits reserve shortfalls, deferred maintenance requirements, or unresolved compliance issues. Review the loan file and servicing history thoroughly.
Maturity Risk applies when the assumed loan has a short remaining term. A loan with only two or three years until maturity means you will face refinancing at prevailing rates soon. Calculate whether short-term savings justify the assumption costs.
Transfer Tax and Title Issues vary by state. Some states impose mortgage recording taxes on assumptions. Engage local counsel to understand tax implications.
How Do You Negotiate a Better Deal Around an Assumable Loan?
The most effective negotiation strategy is to quantify the assumption benefit precisely and use it as leverage in purchase price discussions, recognizing that both buyer and seller benefit from the assumption and can share the financial advantage.
Start by calculating the total value: determine the interest rate differential between the assumed rate and current market rates, multiply by the remaining balance and term, and subtract assumption costs. For example, on a $10 million loan at 4.50% with five years remaining versus current rates of 6.75%, the gross savings total approximately $1,125,000. Subtract $100,000 in assumption costs for a net benefit of roughly $1,025,000.
In practice, this benefit is typically split between buyer and seller, with the allocation depending on market conditions, competing buyers, and negotiating leverage.
Additional negotiation points to consider:
- Request the seller cover servicer legal fees as part of the transaction
- Negotiate an assumption cost cap in the purchase agreement
- Include a detailed assumption timeline with milestones and extension rights
- Address how assumption denial will be handled (earnest money refund, termination rights)
- Discuss credit toward the purchase price for below-market-rate financing
Use our DSCR calculator and commercial mortgage calculator to model different scenarios and determine exactly what the assumption saves compared to obtaining new acquisition financing. Having precise numbers strengthens your negotiating position on both sides of the transaction.
Want expert guidance on structuring a commercial loan assumption? Contact Clear House Lending for a complimentary analysis of your assumption opportunity.
Frequently Asked Questions About Commercial Loan Assumptions?
What is the typical fee for assuming a commercial loan? Assumption fees range from 0.5% to 1% of the outstanding balance, plus legal fees. On a $10 million loan, total costs commonly range from $60,000 to $160,000.
How long does a commercial loan assumption take to complete? Most take 45 to 120 days. CMBS and agency assumptions average 60 to 90 days, while HUD/FHA assumptions require 90 to 120 days. Incomplete applications or servicer backlogs can extend timelines.
Can any buyer assume a commercial loan? No. The buyer must meet qualification requirements including net worth, liquidity, creditworthiness, and experience standards comparable to those applied at origination.
Does the seller remain liable after a loan assumption? In a properly completed assumption, the seller receives a full release from all loan obligations. The assumption agreement formally transfers all liability to the new borrower. However, if the loan includes a carve-out guaranty (for fraud, bankruptcy, or environmental issues), the seller should confirm that the guaranty also transfers to the new borrower or a new guarantor.
Are all commercial loans assumable? No. CMBS conduit loans, HUD/FHA multifamily loans, and most agency (Fannie Mae and Freddie Mac) multifamily loans are generally assumable. Bank portfolio loans typically include due-on-sale clauses that prevent assumption, though exceptions exist. Life insurance company loans vary by agreement. Always review the specific loan documents.
What happens if the loan assumption is denied? The buyer may need new financing, the seller may need to defease or pay off the loan (incurring penalties), or the deal may be terminated. This is why an assumption contingency in the purchase agreement is essential.
Can you assume a commercial loan that is in default? Possibly. A defaulted loan involves the special servicer, higher fees, and potentially modified terms. The special servicer has broader discretion to negotiate modifications concurrent with the assumption.
How does a loan assumption affect the property's down payment requirements? The "down payment" is the difference between the purchase price and assumed loan balance, plus closing costs. On a $12 million property with an $8 million assumable loan, the buyer needs $4 million in equity. See our guide on commercial loan down payment requirements and learn how bridge loans can provide short-term capital during the process.
Sources
- Mortgage Bankers Association (MBA), Commercial and Multifamily Mortgage Origination Survey, 2025
- Federal Housing Administration (HUD), Multifamily Accelerated Processing (MAP) Guide, Chapter 11: Transfers of Physical Assets
- Fannie Mae DUS Lender Guide, Section 601: Assumptions
- Freddie Mac Optigo Seller/Servicer Guide, Chapter 66: Assumptions and Transfers
- Commercial Real Estate Finance Council (CREFC), CMBS Servicing Standard Practices, 2025
- Trepp, CMBS Loan Assumption Activity Report, Q3 2025
- National Association of Realtors (NAR), Commercial Real Estate Market Insights, 2025-2026