What is a “Purchase CEMA”?
A Purchase CEMA, which is also known as a Purchase Consolidation Extension Modification Agreement or a “splitter,” is a type of mortgage where the buyer is essentially taking over the seller’s mortgage and consolidating it with their new mortgage. Overall, a purchase CEMA reduces the closing cost when a buyer purchases a condominium, townhouse, or single-family home in New York City.
Using a Purchase CEMA is a strategy employed to reduce a variety of NYC real estate taxes associated with selling a property. Specifically, the purchase CEMA will reduce closing costs in the following ways: The buyer’s NYC mortgage recording tax will be reduced as well as the seller’s transfer tax bill. In lamens terms, when using a Purchase CEMA, the seller is basically assigning his or her existing mortgage balance to the buyer, who is then assuming and consolidating it into a new loan, and a variety of taxes do not apply to the amount of the original, outstanding mortgage.
What transactions are eligible?
Similar to a traditional CEMA loan, there are numerous limitations to when you can use a Purchase CEMA. To start, a purchase CEMA mortgage is only eligible for New Yorkers. The next requirement is that the seller has an outstanding mortgage. Additionally, all CEMA loans are only available to those refinancing condominiums, houses, and townhouses, and it does not apply to co-ops. That is because coops are not real property and are considered personal property. Finally, all of the parties need to be willing to participate. This includes the buyer and seller, as well as their respective lenders.
How does a Purchase CEMA save money?
Buyers Benefit from a Reduction of the Mortgage Recording Tax
This Mortgage Recording Tax, which is part of the closing cost for closing on a purchase or a refinance, is significant in New York State and is typically the largest closing cost paid by buyers.
The benefit of obtaining a purchase CEMA loan is that you only pay taxes on the difference between your seller’s loan (which they assign to the buyer) and the buyer’s new loan amount.
Sellers Benefit from a Reduction in Transfer Tax
The seller will get a reduction in New York State transfer taxes thanks to a continuing lien reduction. While this is typically a less significant savings than the buyer's reduction in mortgage recording taxes sellers can still use a purchase CEMA as an incentive to attract potential buyers in a soft market.
Example of savings with a Purchase CEMA
Let's take a look at the potential savings provided by a purchase CEMA by using an example of the purchase of a $1,500,000 condo where the seller has an outstanding mortgage of $500,000 which will be rolled into a new mortgage of $1,000,000 for the buyer. Normally a buyer would pay a 1.925% mortgage tax on all $1,000,000 totaling $19,250 but with a purchase CEMA the tax will only be paid on the new money resulting in a bill of $9,625. Meanwhile, the seller will only pay $2,000 in NY State transfer taxes (0.4% of $500,000) instead of $4,000.
As you can see it makes the most sense to use a purchase CEMA when the balance of each mortgage is fairly large. As a general rule, to get the most benefit you the outstanding balance should be at least $400,000.
Expect Longer Closing Times
There are lots of moving parts when obtaining a Purchase CEMA, and cooperation between the parties is essential. A Purchase CEMA requires cooperation between the buyer and seller as well as each party's bank. Additionally, keep in mind that some banks will not provide CEMA loans when refinancing or purchasing with an outside bank. Another potential issue can arise if the chain of title is broken. In that event, that the chain of title is broken and/or your bank has not retained copies of all the material paperwork, more than likely, you will be unable to obtain a CEMA loan.
Typically, the turnaround time for a Purchase CEMA can range from 30 days up to 90 days or longer, but the average would be around six weeks. Therefore, if time is a priority, you may want to consider just obtaining a traditional loan to purchase the property.