CEMA Loans Explained

Have you ever heard of CEMA loans? Likely not. CEMA loans are a unique financing option for homeowners in New York. If you are considering buying a new house or condo, a CEMA loan may help you save big-time on those closing costs.

What Is CEMA and How Does It Work?

A CEMA loan, or a Consolidation, Extension, and Modification Agreement loan, is a refinancing option available to homeowners in New York that can dramatically reduce the costs of refinancing a mortgage.

CEMA loans allow homeowners and first-time homebuyers to avoid paying the mortgage recording tax on the difference between the principal balance on their current loan and the balance of their new loan. If you have a $100,000 mortgage and refinance with a new lender for $200,000, you will only be liable to pay mortgage recording taxes on the $100,000 difference in and not the total $200,000.

In order to record a new mortgage in New York for a townhouse, home, or condo, you must pay both state and county mortgage recording taxes. This tax is 1.8 percent on mortgages of less than $500,000 (and 2.915 percent for mortgages of more than $500,000). If you qualified for a CEMA loan, you would pay a $1,800 tax rather than a $3,600 tax, saving you a large amount of money.

What Exactly Are CEMA Loans, and How Do They Work?

Remember that a CEMA loan is a mutual agreement, not a debt, according to New York Tax Law.

CEMA is a lender-to-lender agreement that allows New York residents to refinance their current loan while only paying the mortgage recording taxes on the difference between the new mortgage and the existing principal balance, including closing costs and cash out.

To demonstrate what we mean, consider this example:

  • The home is valued at $800,000 dollars.
  • $25,400 in closing costs
  • The county tax is 2.15 percent.

If no CEMA loan is obtained, a homeowner will be required to pay taxes equivalent to 2.15 percent of the $800,000 loan amount, or $17,200. 

However, by choosing a CEMA loan, a homeowner will pay taxes equal to 2.15 percent of $25,400 or $546. Refinancing with a CEMA loan will save them $16,654 on the purchase. Buyers, on the other hand, must pay a $1400 CEMA transaction fee.

Who is Eligible for a CEMA Loan? 

  • The buyer or owner of the property must be a resident of New York.
  • FICO scores of at least 680 are required.

What are the CEMA Requirements?

  • You’re buying a new home or a new condo – Because the mortgage recording tax only applies to real estate (this includes houses and condos), a CEMA loan is only relevant to such properties. Because co-ops are considered personal property and are exempt from the recording tax, there are no advantages to owning one.
  • Both party‚Äôs lenders will agree to a CEMA – In order for the deal to close, both the seller’s original mortgage lender and your new mortgage lender must agree to the deal. If either lender has reservations, the transaction will be terminated.
  • It should go without saying that you cannot assume the seller’s mortgage unless the seller agrees. Because the process is time-consuming, you will almost likely have to give them a percentage of your funds (which costs the seller money). Including a CEMA clause in your offer is the simplest approach to prevent additional rounds of discussions after an accepted offer.

CEMA Loan Advantages

While we have seen the benefit of mortgage tax savings from CEMA loans in refinancing, there are other benefits for both buyers and sellers.

Purchaser Advantages

  • Buyers may be able to take advantage of a cheaper interest rate on the seller’s existing unpaid mortgage.
  • The buyer may be able to negotiate upgrades with the seller while using CEMA financing.
  • Closing costs are significantly reduced.

Sellers’ Advantages

  • In New York, the seller pays a lower transfer tax ($4 for every $1000 sold).
  • During the purchasing process, a splitter agreement between the buyer and seller reduces mortgage tax advantages by half.

The Disadvantages of a CEMA Loan

While CEMA has the potential to save you thousands of dollars, there are some disadvantages.

  • A limited number of lenders and institutions make CEMA Loans accessible.
  • The buyer must receive authorization from the seller in order to make a CEMA acquisition.
  • In order to acquire CEMA permission for the acquisition, the buyer will also require the services of an attorney and a mortgage broker.
  • CEMA Loans might take up to 6 months to complete.
  • If a significant percentage of the initial mortgage has already been paid off, refinancing with a CEMA Loan is not a viable option.
  • A one-time CEMA fee is applied to these loans.

How Long Does a CEMA Process Take?

  • The length of time required to complete a CEMA loan is an essential consideration.
  • Not only do you have to go through the process of changing lenders, but New York rules may make it considerably more difficult.
  • Your CEMA loan application may take 30 to 90 days to process.
  • A traditional loan may be a better choice if you need to refinance as quickly as feasible.

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