Conventional loan and then transfer to a multi member LLC

[Ahmed Iqbal]

Hi All:

My sincere apologies if this topic has been answered before. I did search and could not find the exact answer. My scenario is this I am exploring a new market and putting together a 3 member partnership. The out of state lender, I am working with, told me that if I obtain a conventional loan then transfer the property to multi-member LLC at a later point, that might violate the ownership stipulation that was made at the time of the loan origination. Their point is that having someone else besides a spouse in the LLC opens legal questions. One posting that I saw is that as long as the loan originator is the majority owner, it should be fine, but in our case partnership, splitting three ways, that would hardly be the case. Also, the partner, who is the boot on the ground, will be managing partner for us. I am seeking to draw on your experience, on any additional thoughts. The state that we are exploring is Iowa.

Ahmed

[Andrew Postell]

@Ahmed Iqbal the "ownership stipulation" that the lender was talking about sounds like the "due on sale clause". Each conforming, conventional loan (those are the Fannie Mae/Freddie Mac loans if you recognize those names) has a clause that essentially states the lender "may" call the note due if you change title. The same clause also states that the lender is required to give you 30 days to change it back if they ever implemented this. I cannot speak for every lender here but as long as you pay on time, the lender is going to be fine with it. If you don't pay on time, that clause will help them foreclose on you. So just pay on time. The bank makes TONS of money if you pay on time. If they foreclose, they have to move their investment to a loss on their balance sheet...which makes them less desirable to their own lenders and rating companies. No bank wants that. You should be able to switch to the LLC after closing and be totally fine....as long as you pay on time.

I've included the actual verbiage for the "due on sale clause" here for your reference.  Thanks!