Real estate investors and homeowners sometimes ask whether they can purchase a property in the name of a limited liability company (LLC), refinance a property already owned by an LLC, or transfer a property into an LLC after obtaining a mortgage.
The answer depends heavily on the type of mortgage, how title is currently held and the requirements of the lender or loan servicer.
There is an important distinction between financing a property in an LLC from the beginning and obtaining a traditional mortgage personally and transferring the property into an LLC later.
Can You Buy a Property in the Name of an LLC?
With most traditional residential mortgage programs, the borrower is generally required to be an individual rather than an LLC. As a result, a typical conventional residential mortgage generally is not originated directly to an LLC.
That does not mean financing in an LLC is impossible.
We have access to certain Non-QM and portfolio mortgage programs that may allow eligible borrowers to purchase or refinance investment property with title held in an LLC.
These programs can be particularly useful for real estate investors who want the property owned by an LLC from the beginning rather than obtaining traditional financing personally and attempting to transfer the property later.
How Are LLC Mortgage Programs Different?
Mortgage programs that allow LLC ownership may have different underwriting requirements than traditional residential financing.
Depending on the particular loan program and borrower, requirements may include:
- A larger down payment or greater equity in the property
- Additional cash reserves
- Different credit requirements
- Different documentation requirements
- Property cash-flow or rental-income requirements
- Different interest rates, fees or loan terms
Some Non-QM programs may evaluate an investment property using its rental cash flow rather than relying exclusively on the borrower’s traditional personal income documentation. Other programs may use alternative methods of documenting income or assets.
There is no single set of rules that applies to every LLC or Non-QM mortgage. The appropriate financing structure depends on the borrower, property, ownership structure and loan program.
Can You Refinance a Property That Is Already in an LLC?
Potentially, yes.
Certain Non-QM and portfolio programs may allow an eligible investment property already titled in an LLC to be refinanced while maintaining LLC ownership.
Traditional mortgage programs may handle the situation differently and can require title to be held by an eligible individual borrower as part of the refinance.
If keeping the property in an LLC is important, it is worth discussing that requirement before beginning the refinance process so the appropriate loan options can be evaluated.
What If You Already Have a Traditional Mortgage and Want to Transfer the Property Into an LLC?
This is a different situation and one where homeowners should proceed carefully.
Residential mortgages commonly contain a due-on-sale or due-on-transfer provision. Depending on the mortgage and circumstances, transferring ownership of the property without an applicable exception or required consent can potentially allow the lender or servicer to enforce provisions of the mortgage, including acceleration of the debt.
That does not mean every transfer into an LLC automatically causes a mortgage to become immediately due.
The rules can depend on the type of loan, the owner of the mortgage, the servicing requirements and the ownership structure of the LLC.
Are Some Transfers Into an LLC Allowed?
Yes, under certain circumstances.
For example, current Fannie Mae servicing guidelines permit certain transfers of a mortgaged property to an LLC when applicable requirements are satisfied. Among other requirements, the original borrower generally must control the LLC or own a majority interest in it, and additional requirements can apply depending on occupancy and the circumstances of the transfer.
This is an important distinction from the old assumption that transferring any mortgaged property into an LLC automatically violates the mortgage.
However, borrowers should also avoid making the opposite assumption—that because some transfers are permitted, their particular mortgage automatically allows an LLC transfer.
Don’t Assume That Making the Payments Is Enough
Historically, property owners sometimes transferred mortgaged properties into LLCs without notifying the lender and assumed that as long as the mortgage payments continued to be made on time, the transfer would not create a problem.
That is not a strategy I would recommend.
A borrower should determine whether the transfer is permitted under the applicable mortgage and servicing requirements before changing ownership of the property.
The fact that a loan remains current does not by itself guarantee that a particular transfer of ownership is permitted.
Could Transferring a Property Into an LLC Affect a Future Refinance?
Yes.
Even when an LLC transfer is permitted under the servicing requirements for an existing mortgage, the ownership structure can become important when the property is refinanced later.
For example, a property transferred into an LLC under applicable Fannie Mae servicing guidelines generally must be transferred back to an eligible natural person in order to qualify for a subsequent refinance under Fannie Mae guidelines.
Alternatively, depending on the property and borrower, a Non-QM or portfolio refinance that permits LLC ownership may be an option.
Why Do Real Estate Investors Use LLCs?
There can be a number of reasons a real estate investor may want property held in an LLC, including liability, business organization, estate planning or tax considerations.
Those issues are outside the scope of mortgage advice, and the appropriate ownership structure can vary significantly from one person to another.
Before transferring real estate into an LLC, property owners should consider discussing the legal and tax consequences with a qualified real estate attorney and tax professional.
Plan the Financing and Ownership Structure Together
If LLC ownership is important to you, it is often better to discuss that objective before selecting a mortgage rather than obtaining a loan first and trying to restructure ownership afterward.
We can evaluate whether traditional financing makes sense or whether one of our Non-QM or portfolio programs that permits eligible LLC ownership may be a better fit.
Depending on the program, we may have options for investors using an LLC, including borrowers who need alternative qualification methods or properties that do not fit traditional mortgage guidelines.
Thinking about buying, refinancing or holding a property in an LLC?
Call or text me at 240-670-5090 or email me at CJMT@mainstreethl.com. We can review the mortgage options available for your particular situation.
Ready to explore your options? Start your prequalification online.
This article is for general informational purposes only and is not legal or tax advice. Consult an appropriate attorney and/or tax professional regarding the legal, liability and tax consequences of owning or transferring real estate through an LLC.
