I get this question a lot, especially from real estate investors. I would advise that you enlist the help of a real estate attorney, as the ability to do this may vary depending on the state the property is in and the type of mortgage you have. This is post is not legal advice.
Why would you want to transfer to an LLC?
When you own an investment (rental) property you have more liability exposure due to the fact that you have tenants occupying your property. To limit this liability investment property owners often desire to own the home via their LLC. If you own your investment property free and clear (no mortgages on it) then you can do this without any restrictions. However, you would still want to check and see if this would affect the title insurance policy that you obtained when you originally purchased the home or at the time you obtained the most recent mortgage on the property. And you should still also make your homeowners insurance (hazard insurance) company aware. More details on these to aspects are below.
However, when there is a mortgage on the property this becomes more complicated. There is something called a “due on sale clause” that is part of the terms and conditions of your mortgage. This clause essentially states that if ownership is transferred then the balance of the mortgage must be paid at that time. This is where it becomes a grey area. If you “sell” (transfer) your property to your LLC, did it really get “sold”? One could argue that it did because before a person owned it and now a business (your LLC) owns it. On the other hand one could argue that ownership didn’t really change because you are the owner of your LLC.
Buying a property with your LLC
You can obtain buy your property with your LLC and obtain a mortgage on it at the time of purchase to avoid having to subsequently transfer it to an LLC. The disadvantage is that conventional mortgages, which typically offer the lowest rates and best terms, do not allow you to do this. So if you do, you will likely end up with a mortgage with a higher rate and worse terms. So to avoid this, real estate investors often purchase the property with personal ownership so that they can obtain a conventional mortgage and then after closing, transfer to an LLC. so that you can essentially have your cake and eat it.
Considerations for transferring to your LLC
The best practice is to call your mortgage servicing company and let them know what your intentions are and ask them if this permissible to ensure it will not trigger the due on sale clause. Different lenders and loan program will have different rules regarding this.
Guidance for conventional (conforming) mortgages owned by Fannie Mae or Freddie Mac
If your mortgage is a conventional (sometimes referred to as conforming) then that typically means it is owned by either Fannie Mae or Freddie Mac. Who you make your payments to is considered the “servicer” or “sub-servicer” but behind the scenes Fannie Mae and Freddie Mac do own your mortgage, in most cases, if it’s a conventional (conforming) mortgage. Fannie Mae and Freddie Mac, in most instances, do not accept payments directly from borrowers. In other words, they’re not in the business of servicing mortgages. These 2 institutions are government sponsored entities (GSE). You can use these look up tools to find out if your mortgage is owned by either of these GSE’s:
Fannie Mae lookup – https://yourhome.fanniemae.com/calculators-tools/loan-lookup
Freddie Mac lookup – https://myhome.freddiemac.com/resources/loanlookup
If your mortgage is owned by Fannie Mae or Freddie Mac they do offer official guidance on transferring your property to an LLC. They both allow for it as long as you meet certain guidelines. The guidelines can be found at these links:
In a nutshell, this provision is only allowed for mortgages purchased or securitized on or after June 1, 2016. Also, the LLC must be controlled by the original borrower or the original borrower owns a majority interest in the LLC. To my mind, where Fannie Mae is silent is that it doesn’t speak to if there are multiple borrowers on the mortgage. In that case, it isn’t clear to me if all borrowers on the mortgage must also all be members of the LLC
In a nutshell, you must wait 12 months after the origination date before you’re allowed to transfer ownership to your LLC. Freddie goes on to say that: “The managing member/general partner of the LLC/LP is the original Borrower. If there are multiple Borrowers, all of them must be members/partners of the LLC/LP, and at least one of them must be a managing member/general partner.” So they do make it clear that if there are multiple borrowers on the original mortgage then all of them must also be members of the LLC.
In practice it would likely be wise to still contact your mortgage servicer to make them aware even if you have confirmed your mortgage is owned by Fannie Mae or Freddie Mac. The tricky part is, that due to the fact that these guidelines are not well known, the customer service representative that you discuss this with may not have knowledge of these provisions or may be misinformed. So if they tell you that you can’t do this you may need to ask to speak with a manager who is more well informed and you may need to direct them to these guidelines and make them aware that you have confirmed that your mortgage is in fact owned by Fannie Mae or Freddie Mac.
Title Insurance Considerations
The other thing to be aware of is that transferring to an LLC could impact the title insurance coverage that you obtained when you originally purchased your home and/or obtained the most recent mortgage on it. It would be best to inquire with the attorney or title company that assisted with issuing the title insurance policy or with the title insurance policy insurer directly. Their contact info can be found in your closing documents. In your title insurance policy you may find language similar to:
“(D) a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title
(1) if the stock, shares, memberships, or other equity interests of the grantee are wholly-owned by the named insured,”
This verbiage would seem to indicate that you still do maintain title insurance coverage if you transfer to an LLC.
For an extra measure of protection you can obtain special endorsements to your title insurance policy that specifically cover you for a transfer to an LLC. If you’re buying your home and know you will be looking to transfer it to an LLC then it would be wise to request these endorsements at the time you obtain your title insurance policy. If you already have your title insurance policy it would be wise to check the policy to see if these endorsements were issued. These specific endorsements are: 107.9 endorsement or 107.10 endorsement.
Homeowners Insurance (hazard insurance) Considerations
Lastly, you should make your homeowners insurance (hazard insurance) company aware of the transfer and have them update the policy to list your LLC as the insured.
It is very possible that you can successfully transfer ownership of your property to your LLC. By doing so you can save money on your mortgage financing because this will allow your initially purchase your property personally and obtain conventional financing. To facilitate this it takes planning and due diligence to make sure that you follow the rules to ensure that you are doing this properly as it relates to the provisions of your existing mortgage, homeowners insurance and title insurance.