Everyone is aware that limited liability companies (LLCs) can provide liability protection by insulating personal assets from claims by tenants for actual or perceived wrongs by a landlord. While insurance can often provide all the protection that is needed, LLCs provide an additional layer of protection.
Most mortgages have a “due on sale” clause that prohibits transfers of rental properties to LLCs. There is a limited exception for transferring to a trust controlled by the same borrower who took out the loan.
Both Fannie Mae and Freddie Mac are now permitting transfers to LLCs where the LLC is controlled by the original borrower. For example, Fannie Mae’s service manual states that:
“Unless the previous borrower requests a release of liability, the servicer must process the following exempt transactions without reviewing or approving the terms of the transfer:
A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to a limited liability company (LLC), provided that the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).”
To determine if your loan is a Fannie Mae loan, use the Fannie Mae lookup tool: https://yourhome.fanniemae.com/calculators-tools/loan-lookup
To determine if your loan is a Freddie Mac loan, use the Freddie Mac lookup tool: https://myhome.freddiemac.com/resources/loanlookup
If not a Fannie or Freddie loan, you can try the MERS tool as well to see who is servicing your loan: https://www.mers-servicerid.org/sis/
To obtain permission from your bank to transfer to an LLC, contact the loan servicing department or the assumptions department. I called my bank and told them that I would like to obtain permission to transfer the properties to LLCs under D1-4.1-02 of the Fannie servicing guide. I asked if I may proceed to transfer the properties. I also asked them what I can do to avoid running into a problem with their insurance compliance people complaining that the named insured doesn’t match the borrower name in the system.
My bank replied that
- Articles of Organization including:
- Name of the LLC
- Ownership and/or Managing Members of the LLC
If the LLC has not yet been created, provide a request with the expected name of the LLC and ownership and or managing members.
The bank provided a fax number and mailing address. They told me that they
will review and provide a written decline or consent to transfer, please note:
- If accepted
- It is the owner’s responsibility to quit claim/warranty deed the property into the LLC.
- There is no change to the Note, the original debtors will still be responsible for repayment of the loan.
- The insurance policy must include at least 1 note holder’s name. For example:
Name of LLC
c/o Joe Smith
With commercial loans, there was never a problem using LLCs. Commercial loans have less favorable terms than conventional Fannie/Freddie loans and often have interest rates that can increase after a few years of being fixed. They still often have higher starting rates than Fannie/Freddie loans, but easier underwriting with less documentation required. With properties that have more than four units, commercial loans are the only option. But for properties with 1-4 units, even if they are not being owner-occupied, Fannie/Freddie loans are possible. Now, it is possible to obtain the better interest rate and consumer protections of Fannie/Freddie loans and still be able to transfer title to your investment property to an LLC.