CEMA – What Is It And Should You Look For One?

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Ray gun labeled CEMA shrinking mortgage recording tax

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. What does that mean for buyers? Think of it as taking over the seller’s existing mortgage. It’s not quite that simple but it’s a good way to think about it.

What are the its benefits? By taking over the seller’s existing mortgage note, you avoid paying the mortgage recording tax on that amount of your new loan. A CEMA will likely not cover your entire mortgage but with the mortgage recording tax almost 2% of the mortgage amount, you can still save a significant amount of money.

What is required for a CEMA?

  • You are purchasing a condo or house - You're looking to avoid as much mortgage recording tax as possible. 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 not subject to the mortgage recording tax so there is no benefit.
  • 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.

When does it makes sense to execute a CEMA?

We’ll provide some concrete examples shortly but at a high level, the savings need to outweigh the costs. If the seller’s existing mortgage is not large enough or you want to close quickly, a CEMA is likely not worth it.

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 fast. 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.

How much time will a CEMA add to a transaction? It depends, of course. 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.

Do you need to use the same lender as the seller for a CEMA?

Keeping the mortgage with the same lender will likely quicken the process but if you would prefer to use a different lender, as long as they will cooperate with a CEMA, that shouldn’t be a problem.

Which parties need to agree to a CEMA?

The seller and seller’s lender need to sign off. Obviously you, as the buyer, and your lender also need to agree. Both attorneys on the deal will be involved but they just handle the paperwork and aren't involved in the actual negotiation.

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.

Will a seller ask for compensation for a CEMA?

They certainly might. Since you need their approval to take over their mortgage and they know you’re saving money, they might ask for a piece of the pie. In order to avoid another round of negotiation after getting to an accepted offer, a simpler way is to make the CEMA part of your offer.

By confirming the seller actually has an existing mortgage and its amount, you can estimate expected savings and bake it into your bid. In other words, your bid can be for a certain amount and the seller cooperating with the process.

A CEMA does benefits the seller directly though. Because of New York’s Continuing Lien Exclusion, they might be able to deduct the amount of mortgage transferred from the sale price when calculating their transfer tax bill.

It’s unlikely the seller will make any guarantees as the process is out of their hands once the lenders take over but they can promise to do their best to make it happen.

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!

Since a successful CEMA is never guaranteed so it should not be critical to your decision to buy.

Do you get the seller’s interest rate and terms with a CEMA?

No. This is actually a very common misunderstanding. You are not taking over the seller’s mortgage. You don’t just take over for the seller and start making their payments after closing.

The existing mortgage will repackaged into a new mortgage with its own terms reflecting the current market. To take over the terms of the existing mortgage, it would need to be assigned to you which is usually not allowed.

Is a CEMA used when refinancing?

Hopefully! If you’re refinancing a mortgage on a condo or home and you don’t use one, you’ll be stuck paying the mortgage recording tax again. Since that can easily wipe out the savings from refinancing, always make sure your lender will be executing a CEMA for your refinancing.

When does a CEMA makes sense? An example

Purchase price -
Mortgage amount -
Seller’s mortgage -
Mortgage recording tax avoided -
Cost to execute CEMA -
Net savings -

When does a CEMA not make sense? An example

Purchase price -
Mortgage amount -
Seller’s mortgage -
Mortgage recording tax avoided -
Cost to execute CEMA -
Net savings (cost) -
- $1,105

Disclaimer: This post should not be used as tax or legal advice. Please contact a qualified accountant or attorney if you have any questions about your particular situation.

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