Many clients over the years have asked about purchasing a home in the name of an LLC, or transferring their property into an LLC after they own it. This idea usually stems from them hearing from friends, relatives or advisers that putting their property into an LLC will provide a level of protection against their other assets should an accident occur at the property. This is true, however there is a lot more to consider before starting down this path. Traditional mortgages will not allow a mortgage to be originated in the name of an LLC, so most people assume that they will purchase the home and then transfer it to their LLC later.
The elephant in the room is the lender who currently services the mortgage on the subject property. For nearly thirty years, lenders have had a “DUE ON SALE” clause in their standard residential mortgage disclosures that, in simple terms, says that you cannot transfer ownership of your property without the lenders written consent. Most people these days with traditional mortgage financing have signed this document. Regardless of if you are able to accomplish the transfer of the property to the LLC, you are still always still personally responsible for the mortgage.
In speaking with a local attorney friend about his dealings with clients who wanted to do this, he said that any good attorney will always call the lender associated with the mortgage against the subject property and ask for authorization before starting this process. So, for anyone thinking that they could do this without the lender finding out, may need to rethink their plan. That’s not to say that the transfer could not be accomplished without the lenders consent first, but it would be a risk and likely not a risk that an attorney would advise you to take.
My recommendation for anyone who is thinking about doing this, is to first speak with a local real estate attorney and a tax adviser. Once you understand all the legalities and tax implications, then you should reach out to your mortgage lender to see if you can obtain written consent. Even if the mortgage lender denies the request, there are definitely other strategies that a tax adviser and real estate attorney can recommend.
Here is the actual clause from the mortgage loan disclosure:
Transfer of the Property or a Beneficial Interest in Borrower. As used in this Section 18, “Interest in the
Property” means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests
transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which
is the transfer of title by Borrower at a future date to a purchaser.
If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural
person and a beneficial interest in Borrower is sold or transferred) without Lender’s prior written consent, Lender may
require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be
exercised by Lender if such exercise is prohibited by Applicable Law.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period
of not less than 30 days from the date the notice is given in accordance with Section 15 within which Borrower
must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of
this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand
on Borrower.
**This post is for general information purposes only. We are not tax or legal advisers. Be sure to consult an attorney or tax adviser**
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