Can Someone Clarify This One Point of Commercial Financing?

Question

At what point do you start qualifying for commercial loans? When you buy something more than 4 units?

I ask because we have an LLC and want to transfer then from us to our LLC at closing. But then at some point with BRRRR properties, you're going to be maxed out for getting anymore financing with conventional loans, right? (Due to income v. debt)

Scott VanHee · Answer

@Keith L. SFH can be put into an LLC, however, doing so changes your financing options.

The traditional Fannie Mae mortgage requires the borrower to be an individual.  So, putting the property in an LLC typically means that you’ve eliminated the residential/consumer type mortgage - the one most people want because of the long term low fixed rates.

Lots of people say to just close in your name and then afterwards quit claim to your LLC.  While you could do this, what typically isn’t pointed out is that those loan docs you signed include a call/demand feature that allows the lender to call/demand full repayment if title changes - which is exactly what happens when you do the quit claim.  So, it becomes your risk tolerance.  Are you willing to roll the dice that the lender won’t call the note.

Other option to consider and discuss with your lender that may eliminate the above risk - LLC owns the property, but loan is in your name - not the LLC.

David M. · Answer

@Kristyn Grimes

Okay.  Just remember besides the Due on Sale Claude, there is the matter of protecting/maintaining your corporate veil as I very briefly mentioned above.  When you transfer Title you need to check on your Title Insurance policy, make legal arrangements for your mortgage payments (it’s still in your name so the payment should be drafted from your bank account and not the LLC’s), and update your landlord insurance (which could trigger the clause since the note services will be notified).

Feel free to direct message me if you wasn’t to chat more

Keep doing your homework and speak to a few qualified professionals.  Good luck.

David M. · Answer

@Keith L.

Of course you can take title of a single family residence in a LLC.  However, its the entity that owns the property that is qualifying for the loan.  Having a residential property (1-4 family residence) is one factor in getting a conforming residential loan.  The other factor is actually a person owning the property.  When Title is held by a legal entity, you can't get a conforming loan, so you have to get commercial funding.

Does that clear is up some?

Cal Dunagan · Answer

David brings up a ton of great points. Have you considered reaching out to a real estate attorney? This article might be helpful on determining whether or not you need legal advice. If you decide you do need a lawyer, make sure you ask the right questions when you're shopping around so you get the right advice.

Kristyn Grimes · Answer

Thank you, Scott! Great advice! I've added getting in contact with a few lenders whom I know to my to-do list for this week.

Kristyn Grimes · Answer

Hi David,

Thanks for your input. We're trying to put each of our properties under our series LLC, limiting our exposure. I read on these forms all day about folks doing the title transfer without the bank knowing and, to me, that feels like throwing caution to the wind. I'd like to know more about it before ending up becoming that is 2% who actually do end up getting their notes called due. (It would be my luck!)

Keith L. · Answer

Yes it does

David M. · Answer

@Kristyn Grimes

Everything Scott mentioned just jeopardizes your corporate veil in my layman's opinion.  Yes, lots of people do it, but I haven't heard of one of them being sued, much less demonstrating in their State that their corporate veil wasn't pierced because of it.

Consult some qualified professionals.

David M. · Answer

@Kristyn Grimes

Any property whose Title is held by a LLC requires commercial financing. The entity doesn’t qualify for conforming residential loans.  Any property with OVER 4 units is considered commercial.

What are you doing with your LLC?  Be careful with moving Title back and forth or just transferring.  This comes up nearly daily on BP where people are doing actions which in my layman’s opinion is jeopardizing their corporate veil.  You really need everything (eg Title and mortgage) under the LLC to get the full liability limitation, for one.

Good luck

Can Someone Clarify This One Point of Commercial Financing?

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