No cash out refi on property held in LLC under new Fannie Mae?

21 Replies

Hi folks, 

I was just shy of the finish line on a cash out refi on a rental I hold in an LLC...when today my Lender called and said a 'new Fannie Mae guideline' prohibits cash out refinances on properties owned through an LLC...so now according to him the ONLY way I can do the cash out refi is to quit claim to my personal name, let it season for 6 months, THEN do the cash out.

He has been in the industry for quite a while and works with a lot of investors so I want to believe him but REALLY?!?!  How many of us take down properties all cash through our entities and then want to cash out?  Can this really be the case?

@Russell Brazil before proceeding with this cash out refi I surveyed several lenders who all said it wouldn't be a problem because I acquired the property all cash - were they really all mistaken?  This particular lender has been in the business for a long time and was a referral from a fellow BP member.

@Russell Brazil this is from the Fannie guidelines under the "Delayed Financing Exception":

  • a natural person;
  • an eligible inter vivos revocable trust, when the borrower is both the individual establishing the trust and the beneficiary of the trust;
  • an eligible land trust when the borrower is the beneficiary of the land trust; or
  • an LLC or partnership in which the borrower(s) have an individual or joint ownership of 100%.
Originally posted by @Dave Hurt :

@Russell Brazil this is from the Fannie guidelines under the "Delayed Financing Exception":

  • a natural person;
  • an eligible inter vivos revocable trust, when the borrower is both the individual establishing the trust and the beneficiary of the trust;
  • an eligible land trust when the borrower is the beneficiary of the land trust; or
  • an LLC or partnership in which the borrower(s) have an individual or joint ownership of 100%.

Right above that in the guidelines it states "For this refinance transaction, the borrower(s) must meet Fannie Mae’s borrower eligibility requirements as described in B2-2-01, General Borrower Eligibility Requirements. The borrower(s) may have initially purchased the property as one of the following:".......so you still need to meet the borrower requirements which require taking title to the property as an individual if you follow over to the borrower requirements. So what they are stating is that in the past you owned as an LLC with 100% ownership, but to borrow against it it will need to be titled in your own name. "

  • signing the security instrument,
  • signing the mortgage or deed of trust note,
  • taking title to the property in the name of the individual borrower(s)."

@Russell Brazil I cannot believe my guy missed this then! Under the delayed financing exception, which allows a cash out in less than 6 months from taking title, you can take title under your LLC but quit claim into your personal name...if that is the case why are they now requiring a 6 month seasoning period while held in my personal name?

@Dave Hurt @Russell Brazil The guideline states "The borrower may have INITIALLY purchased the property as one of the following "

  • a natural person;
  • an eligible inter vivos revocable trust, when the borrower is both the individual establishing the trust and the beneficiary of the trust;
  • an eligible land trust when the borrower is the beneficiary of the land trust; or
  • an LLC or partnership in which the borrower(s) have an individual or joint ownership of 100%.

It's referring to the how the property was originally purchased. It has nothing to do with the new mortgage applied for. The new mortgage has to follow acceptable Fannie guidelines for title and an LLC is not one of them and this is not a new guideline. The only way to avoid this is by using a portfolio product (meaning non fannie or freddie).

@Dave Hurt In the past Fannie allowed cash-out refi on properties even if they were held in LLC (as long it was 100% and more then 6 months). Guidelines have changed (which they do all the time) and now the 6 months seasoning requirement has to be meet by the title being the individuals name.

Your options are:

* Transfer title and wait for 6 months

* Get a residential portfolio loan (30 yr fixed, but higher rate)

* Get a commercial portfolio loan (5-7 yr balloon, 20-25 yr amortization)

Seems that you guys have already figured it out, @Russell Brazil . :)

Unless someone doesn't like low rates and 30 year fixed, there's no reason to form an LLC. You can have the LLC, or the Fannie/Freddie terms, but not both.

If you prefer higher interest rate commercial ARMs, LLC away.

Originally posted by @Dave Hurt :

[...] I suppose it wasn't enough to just tell the lender that I owned the property in my LLC [...]

Which, really, actually is a tragedy. Because 1+1 still is typically 2: Why would anyone want to buy (all cash) via an LLC and then take title in their personal name later?! At least to me this makes no sense. You might as well then buy the damn place in your name right from the start (as it's all cash and no commercial lender involved who typically require an LLC). Therefore the baseline assumption of a lender for such a situation should be: "Borrower wants to refinance in LLC, has title in LLC and wants to keep title in LLC. Better tell him that this scenario does not work for FaM/FrM."

But no, they just happily work away, hitting the wall at full speed, wasting anybodies time in the process...

Then again, the baseline here is - once more - proper communciation. And that indeed typically goes two-ways.

@Chris Mason thanks for chiming in - I use LLC's for asset protection. In my situation it is primarily because I own several restaurant franchises and franchise rights for several territories, which I have to protect - so I hold each restaurant in an LLC and my real estate business in a separate LLC.

The last thing I want is a patron suing me for slipping in my restaurant and going after my rental portfolio and other personal assets...and the the converse - a tenant suing me and going after my restaurant businesses, so my attorney advised protecting all of my assets via entities.

It seem I may be doomed to less favorable refi terms but so be it if that means protecting my all of my various assets.

I just closed on a CO Refi for an investment property with a commercial loan at 4.75%. Rates are low right now so commercial loan are not bad at all 

@Dave Hurt

There is a way for you to cash out using regular residential financing without having to wait for 6 months seasoning in your personal name, and without having to meet the delayed financing guidelines, so long as the following are met:

1 - You owned the property in an LLC for at least 6 months

2 - You are the 100% owner of the LLC

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