Never heard of a CEMA? Join the club. For most buyers, it’s just another strange acronym in the home buying process but it can dramatically reduce your closing costs. If you’re looking to buy a condo or house, you should know about CEMAs and see if one is available on your transaction.
What is a CEMA and what are its benefits?
CEMA stands for “Consolidation, Extension, & Modification Agreement” and is an agreement between two lenders regarding an existing mortgage. Think of it as taking over the seller’s existing mortgage. While you’ll get your own mortgage at current interest rates, you avoid “recording” a new mortgage with New York State and NYC which means you also avoid the mortgage recording tax on that principal.
You’ll likely still need to take out some “new” mortgage in addition to a CEMA but with the mortgage recording tax almost 2% of the mortgage amount, you can still save a significant amount of money.
While using the seller’s lender will likely speed up the process, it’s not necessary. As long as you, the seller and both lenders are onboard, a CEMA shouldn’t be a problem.
There are costs to a CEMA though - both time and money - so you need to make sure you’ll save enough to justify the process. Very roughly, if the seller’s mortgage is not at least $300,000, it’s not worth the hassle.
What is required for a CEMA?
- You are purchasing a condo or house - Since the mortgage recording tax is only applied on real property - condos and houses - a CEMA only makes sense on those types of properties. Co-ops are personal property which are not subject to the mortgage recording tax so there is no benefit on those.
- Both lenders will approve a CEMA - Both the seller’s original lender and your new lender need to cooperate with the process. If either lender is unwilling, that's a non-starter.
- The seller needs to agree - Obviously you can’t take over the seller’s mortgage without the seller’s approval. Since the process takes time (which costs the seller money), you will likely need to give them some of the savings. In order to avoid another round of negotiation after an accepted offer, the simplest approach is to include a CEMA as part of your offer.
How long does a CEMA take?
From a deal standpoint, your CEMA should start with the initial offer. If you find out the seller has a large enough mortgage and is willing to cooperate, you should include the seller’s participation with your bid. If you bring it up after the contract is signed, the seller may demand a significant chunk of the savings or not cooperate because they want to close quickly. By including a CEMA with your bid (or at least an attempt), everything is transparent from the start.
Most lenders will initiate the actual CEMA process after underwriting has been completed. That means after you submit all your documents, the appraisal has been completed and the lender has everything else it needs to issue a commitment letter. Then, now that the lender is sure they’ll issue you a mortgage, they’ll start the CEMA paperwork.
If you are using the same lender as the seller, it shouldn’t cause much of a delay. However, if the mortgage is going to a different lender, especially one that is not as experienced with CEMAs, it could push out the closing a few weeks.
How much does a CEMA cost?
All in, expect to pay $2,000 - $3,000. A rough breakdown of those costs is $500 - $1,000 for each of the lenders and an additional $500 fee for your lender’s attorney.
You should also consider the cost of delays, especially if the mortgage is being transferred to a new lender. If you’re on a tight timeline, it might not be worth executing a CEMA even if it will save you a few thousand dollars.
What problems can arise after a CEMA has been initiated?
Assuming both lenders are onboard, a CEMA will usually go through. It takes some time but the process is pretty formulaic. That being said, there can be issues. A simple example is if the seller’s lender can’t find the original note. If they can’t find it, they can’t transfer it. It sounds crazy but lenders are big and things get lost!
A successful CEMA is never guaranteed so it should not be critical to your decision to buy.
When does a CEMA makes sense? An example
- Purchase price - $2,000,000
- Mortgage amount - $1,600,000
- Seller’s mortgage - $1,400,000
- Mortgage recording tax avoided - $26,950
- Cost to execute CEMA - $3,000
- Net savings - $23,950
When does a CEMA not make sense? An example
- Purchase price - $2,000,000
- Mortgage amount - $1,600,000
- Seller’s mortgage - $100,000
- Mortgage recording tax avoided - $1,800
- Cost to execute CEMA - $3,000
- Net savings (cost) - ($1,200)
