Refinance - LLC to Conventional

9 Replies

My business partner @Duran Villegas and I have 3 small multi-family investment properties in Memphis, Tennessee, held under the name of our LLC that we would like to refinance. Two tri-plexes and one duplex. One of the loans is hard money, and the other two are portfolio loans (7%, 5-fixed, 20 yr am, and 4.75%, 5-fixed, 20 yr am). We are looking to restructure the debt into longer term fixed conventional debt, which we are aware this can be done in our individual names. My business partner has one year of W2 and one year self-employment. The issue that we are running into is that conventional underwriting is requiring that my business partner show TWO years self-employment. We suggested qualifying the loan under one (my) income only (which exceeds the minimum income qualifications), but underwriting has indicated that both LLC members are required to qualify.

Has anyone else experienced this issue? We are open to suggestions or other lending options to restructure our debt on these properties. 

Accepted - thank you!

@Ethan Edwards some basic information here in case it is helpful to you:

In the lending world there are basically 2 types of loans for these properties - "Conforming" loans or "Portfolio" Loans.

A "Conforming" loan is a loan governed by Fannie Mae and Freddie Mac (if you recognize those names). You can this same loan from any bank. The rules to Fannie/Freddie loans is that you have to loan in a person's name. 30 year fixed rates here with a lower rate than other loan types. The rates and terms are better for these loan types but there's not much flexibility for the bank to make a decision - since it's not their money. So if you wanted to use this loan type and just lend in your name you could. You would just have to close in your name. Closing in an LLC is not an option here but you could close in your name and switch back to the LLC after closing.

A "Portfolio" loan is a loan that comes from the bank's own portfolio of money - thus the name.  So the bank makes the call.  These loans could be easier to qualify for but the terms are different than a conventional loan.  Sometimes the rates are adjustable, sometimes they are higher rates, sometimes these are 15 year loans....and often they are all three of these.  And since the bank makes their own decision on their own money...each and every bank will have slightly different loan rules.  You would literally have to call each and every bank to find out the rules to each and every portfolio loan out there.

I'm putting this information here in case it is helpful to you in some way or if someone else stumbles upon this topic.  This is a very common issue facing many investors. If the previous post does not pan out my recommendation would be to post this in the "Tennessee" forum here on Bigger Pockets to see what banks some local investors use or to just call some smaller banks close to the properties or to search for some mortgage brokers in the area.  A mortgage broker has relationships with many different banks.  

Hope this helps!

This is good information @Andrew Postell - thank you. Yes, we are looking for conforming and we are encountering the lack of flexibility. In particular, not being able to refinance out of our LLC and into our names. Perhaps we should have originally opted for a conventional loan. However speed in closing was a concern, so we chose hard money and portfolio loans. Your recommendation to post in the "Tennessee" BP forum is a great recommendation!

@Ethan Edwards Just quit claim the property from you and your partners LLC to your personal name get the loan then after 60-90 days of refinancing quit claim back to your LLC.

Thank you @Sean Tagge for your insight. My business partner @Ethan Edwards and I have been researching this process and were told by a few Fannie/Freddie lenders that there is s 6-month seasoning for the property to be in an individual's name. Have you encountered this or has this not been your experience?

Not that I have heard of but sounds like something they would require. 

So the guy to talk to is Aaron Champman with SNMC he does hundreds of investor loans in Memphis. He would know how to best help you. 

I guess your other option would be to call local banks and get it into a portfolio loan they don't mind if it's in an LLC.

Best of luck.

@Duran Villegas there could be two possibilities to why you are being told 6 months, but to answer your question - to do a straight refinance with a Fannie/Freddie loan you only have to be on title for 1 day.  However, the 2 reasons you were told 6 months might be:

1. If you were trying to get a cash out loan. If you were trying to do a cash out loan in the first 6 months of being on the property then there are all sorts of rules to this. If you purchased a property with cash, and needed cash again, there are some exceptions but if you have owned the property in you LLC for several months and then switched to your personal name to get cash out - you would have to wait 6 months.  If you want to read about my exception to this rule you can see the posting I wrote HERE

2. The bank could have an "overlay" that requires you to wait 6 months.  An overlay is an extra rule that a bank puts ON TOP of the Fannie/Freddie rules to lending.  So while Fannie/Freddie only require 1 day on title, they do allow a bank to wait longer if they want.  I've even seen 12 months before from some lenders.  It sounds weird but it is true.  This is why so many investors preach to use a smaller to mid-sized lender - and NO large banks.  Large banks have the most overlays.

I hope this helps in some way but feel free to ask more questions if you need.  Thanks!

@Sean Tagge , thank you for the reference. We'll reach out and talk with Aaron to follow-up on potential financing leads. We are currently reaching out to and have made contact with 3-4 other local banks and are hopeful. We appreciate your insight.

@Andrew Postell , we believe your second reason is likely why we are hearing 6 months...due to the overlays.   We've described our financing intentions to lenders as straight forward refi's (no cash/out). As indicated above, we'll continue searching for smaller, local banks as you suggest. Thanks so much for your help and insight on the process as I know others will also find it very helpful!

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