How often does using quitclaim deed to transfer ownership to LLC trigger due on sale
Member since 2025 · 2 posts · 0 votes
How often does using quitclaim deed to transfer ownership to LLC trigger due on sale
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesQuote from @Ned Carey:
@Bryan Lewis This has been discussed many times here. a search may help. @Chris Seveney and @Don Konipol have written about this recently.
Two issues, first I don't recommend transferring to an LLC from your own name just to get better financing. There are issues your lender will never tell you about because they are not a lawyer.
Second, yes you are correct that most loans do not get called for due on sale. However now that rates are rising, lenders have a reason to call loan with a low interest rate. They can reloan the money at a higher rate.
Yeah, there is a lot of misunderstanding and mis information concerning due on sale clause.
To start at the beginning, prior to 1978 almost all residential mortgages did NOT contain due on sale clauses. When interest rates skyrocketed from 6% to 18%, lenders began putting due on sale clauses into deeds of trust and mortgage instruments/notes, especially since many mortgages were being originated with “teaser” rates and “buydowns”. In response to consumer complaints, individual states began enacting laws negating these due on sale clauses. Congress, acting on pressure from the lending industry, passed the St Germaine bill which prohibits individual states from passing laws that render due on sale clauses non enforceable.
The law also provides specific exceptions outlining instances when a lender can not proceed to foreclose despite a property “transfer”. Most of these have to do with death of a property owner and either inheritance or purchase by a near relative, or in a divorce situation. There is a provision that prohibits enforcement for due on sale “a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property”.
So, the borrower/owner CAN place his property into a living trust he controls. Some pundits took this to mean that an individual can transfer the property into an LLC they control, or an LLC that's owned by their trust. This did not survive court challenge.
It’s important to understand what the law does NOT do. It does not make the transfer of real property without paying or obtaining lender permission illegal, immoral, unethical, or anything like that, despite the insistence of some posters on BP (LOL). AND it does not say a lender HAS TO or WILL enforce the due on sale if they find out. It does not say that the borrower has any obligation to inform a lender of a property transfer.
Some investors don’t want to live with a potential “time bomb” of possible due on sale clause enforcement over their head. Others, are willing to accept the risk and make preparations for the eventuality. It’s interesting g to note that business owners often live with the greater risk of their term loans , receivables financing, and working capital loans being called due at the worst possible time as these loans are due at the whim of the lender.
8 Replies
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes1y
@Bryan Lewis This has been discussed many times here. a search may help. @Chris Seveney and @Don Konipol have written about this recently.
Two issues, first I don't recommend transferring to an LLC from your own name just to get better financing. There are issues your lender will never tell you about because they are not a lawyer.
Second, yes you are correct that most loans do not get called for due on sale. However now that rates are rising, lenders have a reason to call loan with a low interest rate. They can reloan the money at a higher rate.
- 1yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
Quote from @Ned Carey:
@Bryan Lewis This has been discussed many times here. a search may help. @Chris Seveney and @Don Konipol have written about this recently.
Two issues, first I don't recommend transferring to an LLC from your own name just to get better financing. There are issues your lender will never tell you about because they are not a lawyer.
Second, yes you are correct that most loans do not get called for due on sale. However now that rates are rising, lenders have a reason to call loan with a low interest rate. They can reloan the money at a higher rate.
Yeah, there is a lot of misunderstanding and mis information concerning due on sale clause.
To start at the beginning, prior to 1978 almost all residential mortgages did NOT contain due on sale clauses. When interest rates skyrocketed from 6% to 18%, lenders began putting due on sale clauses into deeds of trust and mortgage instruments/notes, especially since many mortgages were being originated with “teaser” rates and “buydowns”. In response to consumer complaints, individual states began enacting laws negating these due on sale clauses. Congress, acting on pressure from the lending industry, passed the St Germaine bill which prohibits individual states from passing laws that render due on sale clauses non enforceable.
The law also provides specific exceptions outlining instances when a lender can not proceed to foreclose despite a property “transfer”. Most of these have to do with death of a property owner and either inheritance or purchase by a near relative, or in a divorce situation. There is a provision that prohibits enforcement for due on sale “a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property”.
So, the borrower/owner CAN place his property into a living trust he controls. Some pundits took this to mean that an individual can transfer the property into an LLC they control, or an LLC that's owned by their trust. This did not survive court challenge.It’s important to understand what the law does NOT do. It does not make the transfer of real property without paying or obtaining lender permission illegal, immoral, unethical, or anything like that, despite the insistence of some posters on BP (LOL). AND it does not say a lender HAS TO or WILL enforce the due on sale if they find out. It does not say that the borrower has any obligation to inform a lender of a property transfer.
Some investors don’t want to live with a potential “time bomb” of possible due on sale clause enforcement over their head. Others, are willing to accept the risk and make preparations for the eventuality. It’s interesting g to note that business owners often live with the greater risk of their term loans , receivables financing, and working capital loans being called due at the worst possible time as these loans are due at the whim of the lender.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Ned Carey:
@Bryan Lewis This has been discussed many times here. a search may help. @Chris Seveney and @Don Konipol have written about this recently.
Two issues, first I don't recommend transferring to an LLC from your own name just to get better financing. There are issues your lender will never tell you about because they are not a lawyer.
Second, yes you are correct that most loans do not get called for due on sale. However now that rates are rising, lenders have a reason to call loan with a low interest rate. They can reloan the money at a higher rate.
I stopped responding to these as most people are just throwing money away doing this thinking they are creative and providing superior asset protection.
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- 1yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
FNMA allows transfer of deed to LLC if mortgage originated after June 1, 2016 and original borrower owns a majority interest in the LLC and any 12 months of owner-occupancy is first met.
https://servicing-guide.fanniemae.com/svc/d1-4.1-02/allowable-exemptions-due-type-transfer
Logical Property Management4.9458 Reviews - Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes1y
@Chris Seveney I hear you. I respond as much for those reading along so they don't make the same mistakes. Mainly listening to BS Gurus.
- Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes1yand most of the people posting won't follow the advice anyway.
Quote from @Ned Carey:
@Chris Seveney I hear you. I respond as much for those reading along so they don't make the same mistakes. Mainly listening to BS Gurus.
- 1yNick BelskyBusiness MemberResidential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes
#1, your lender is incorrect. You do not HAVE TO go into a ballooning mortgage. You can simply use your entity and use a DSCR product to be in a 30 year fixed rate mortgage just like a conventional loan, but with different qualifying income approach. DSCR is designed for investors and entities. There is no need to do a bridge loan unless you are working against a tight closing deadline or need to roll rehab funds into your initial loan. IMO, get a different lender who knows investment products.
#2, Fannie does have a provision where you can QCD to an entity after 6 months of ownership on an investment property. The entity may be questioned and you will have to show controlling ownership to avoid the Acceleration Clause, if they even catch wind of it.
#3, although there is a real risk here, I've never met anyone (client or lender) who has seen an Acceleration Clause acted upon for only a QCD change. If there are late payments, change in ownership on deed with no continuity, etc... sure... then the risk factor is much much higher.
The notion that investors must use conventional financing is far outdated as DSCR programs are not only equally competitive in costs to conventional, but have far greater exposure limits, if any. Many lenders will allow investors to have 100 DSCR loans if those wanted to. With conventional, you are capped to 10 (11 if Freddie). Period. Not to mention the ridiculous hoops to get DTI qualified (not to mention no file will be UW the exact same way twice). Conventional financing is designed for consumers buying personal homes, not for the average business owner or investor. The guidelines make that more than evidently clear.
Cheers!
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