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Chris Mason
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Oh yeah, the "Due on Sale" clause is now LLC-friendly, sometimes

Chris Mason
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ModeratorPosted Sep 3 2018, 13:48

Totally meant to post this like a year ago. On page 292 of the document, which is page 309 of the PDF. That link is to the servicing guide for Fannie Mae loans that was updated on 11/8/2017, so the page number and information might not be accurate if you are reading this post too far in the future. I am posting this on 9/3/2018. FHA loans, Freddie Mac Loans, VA loans, jumbo loans, portfolio loans.... all of these are NOT Fannie Mae loans, so this isn't applicable to them.

Section D1-4.1, Information Relating to Transfers of Ownership Applicable to All Mortgage Loans
D1-4.1-01, Determining Whether a Transfer of Ownership Is Permitted (11/12/2014)
[...]
D1-4.1-02, Allowable Exemptions Due to the Type of Transfer

A transfer of the property [...] to [...] a limited liability company (LLC), provided that: the mortgage loan was purchased or scuritized by Fannie Mae on or after June 1, 2016, and the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).

Note: The servicer must notify the borrower that a property transferred to an LLC must be transferred back to a natural person prior to any subsequent refinance application in order to meet Fannie Mae’s Selling Guide underwriting requirements.

Before anyone bombards me with questions, I'm not a loan servicer or a lawyer, I'm a loan originator. Post origination, I have minimal professional experience with servicing/legal stuff. I know exactly where a lot of minds are going, especially with that last bit in parenthesis, but I'd strongly suggest lawyering up to get an answer to your question. The above is Fannie Mae's own interpretation of the clauses in her own note and deed of trust that you sign at the closing table, laws/judges/etc of course trump Fannie Mae guidelines, this is just Fannie telling loan servicers what they are supposed to do for a loan that was originated as a Fannie Mae loan.

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Amanda G.
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Amanda G.
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Replied Sep 4 2018, 09:55

This looks like good news! It might save me having to quit claim property back into my name if my mortgage company decides to notice the shift in ownership.

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Andy Mirza
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Andy Mirza
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Replied Sep 4 2018, 11:04

It appears that the exemption only applies to loans originated on or after 6/1/16 AND where the transfer is to an LLC that is controlled by the original borrower. So, if you take out a loan personally and transfer the property to your LLC that you control, you will be exempt. I don't think this changes anything for most investors.

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Chris Mason
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Chris Mason
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ModeratorReplied Sep 5 2018, 23:54
Originally posted by @Andy Mirza:

It appears that the exemption only applies to loans originated on or after 6/1/16 AND where the transfer is to an LLC that is controlled by the original borrower. So, if you take out a loan personally and transfer the property to your LLC that you control, you will be exempt. I don't think this changes anything for most investors.

It changes things for the 50 threads each day that consist of debates about the due on sale clause if they transfer it into an LLC the day after closing, and all the new REI that have no significant assets to protect, but that want to protect their non-significant assets in an LLC. :)

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Replied Sep 6 2018, 00:56

@Chris Mason Thanks. That is a substantial post. I haven't read all 856 pages yet, but I'm sure there is a gem in there and makes for a great read. ;-)

I transfer title to my LLC's when I buy "Subject To" so I always keep an eye on things like this. It doesn't always impact me, but I'd rather know about and not need it, than not know about it and could have been able to use it.

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Andy Mirza
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Andy Mirza
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Replied Sep 6 2018, 06:17
Originally posted by @Chris Mason:
Originally posted by @Andy Mirza:

It appears that the exemption only applies to loans originated on or after 6/1/16 AND where the transfer is to an LLC that is controlled by the original borrower. So, if you take out a loan personally and transfer the property to your LLC that you control, you will be exempt. I don't think this changes anything for most investors.

It changes things for the 50 threads each day that consist of debates about the due on sale clause if they transfer it into an LLC the day after closing, and all the new REI that have no significant assets to protect, but that want to protect their non-significant assets in an LLC. :)

 Maybe your post will reduce that number from 50 to 45 threads s day, haha!

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Brian Bistolfo
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Brian Bistolfo
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Replied Nov 9 2018, 17:48

It changes things for the 50 threads each day that consist of debates about the due on sale clause if they transfer it into an LLC the day after closing, and all the new REI that have no significant assets to protect, but that want to protect their non-significant assets in an LLC. :)

@Chris Mason Sorry I've just contributed to that...thanks for nipping one in the bud anyway :)

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Stanley Bronstein
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Stanley Bronstein
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Replied Nov 9 2018, 18:27

@Brian Bistolfo, @Chris Mason, @Andy Mirza. One issue about Quitclaims is that you might run into problems with your title insurance policy when you quitclaim it to your LLC.

https://denhalaw.com/quit-claim-deed-of-property-may-adversely-affect-title-insurance/

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Brian Bistolfo
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Brian Bistolfo
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Replied Nov 9 2018, 18:42
Originally posted by @Stanley Bronstein:

@Brian Bistolfo, @Chris Mason, @Andy Mirza. One issue about Quitclaims is that you might run into problems with your title insurance policy when you quitclaim it to your LLC.

https://denhalaw.com/quit-claim-deed-of-property-may-adversely-affect-title-insurance/

This would be on the exit when you go to sell? Or does title insurance come into play during the quit-claim process itself?

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Stanley Bronstein
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Stanley Bronstein
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Replied Nov 9 2018, 18:45

@Brian Bistolfo The title insurance is not an issue unless a defect in title comes up after closing. If and when you went to file a claim on your title insurance policy, you might discover that you wiped out your title insurance coverage.

Your lender wouldn't be very happy about that either, as the title insurance is designed to protect them as well.

Personally, I don't like quitclaim deeds and I almost never use them for clients. I always recommend using a warranty deed for the very reasons recommended in the article.

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Brian Bistolfo
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Brian Bistolfo
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Replied Nov 9 2018, 19:20

Thanks @Stanley Bronstein! It looks from the language like Fannie doesn't care how ownership is transferred...so warranty deed it is I suppose.

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Replied Nov 9 2018, 19:33
Originally posted by @Stanley Bronstein:

@Brian Bistolfo The title insurance is not an issue unless a defect in title comes up after closing. If and when you went to file a claim on your title insurance policy, you might discover that you wiped out your title insurance coverage.

Your lender wouldn't be very happy about that either, as the title insurance is designed to protect them as well.

Personally, I don't like quitclaim deeds and I almost never use them for clients. I always recommend using a warranty deed for the very reasons recommended in the article.

 Long ago and far away when I was a newbie investor, I used a Quit Claim deed to transfer and it ended up in a law suit. Nasty, nasty. I won, but I could have avoided the problem if I'd used a closing attorney and a Warranty Deed. Let Escrow decide if a Quit Claim Deed is needed, as an investor it should not even enter your mind to use a QCD. IMHO, real life experience.

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Chris Mason
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Chris Mason
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ModeratorReplied Nov 9 2018, 22:54
Originally posted by @Stanley Bronstein:

@Brian Bistolfo The title insurance is not an issue unless a defect in title comes up after closing. If and when you went to file a claim on your title insurance policy, you might discover that you wiped out your title insurance coverage.

Your lender wouldn't be very happy about that either, as the title insurance is designed to protect them as well.

Personally, I don't like quitclaim deeds and I almost never use them for clients. I always recommend using a warranty deed for the very reasons recommended in the article.

If I'm transferring my own property into my own revocable living trust or LLC, is there any reason I would not use a warranty deed? 

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Stanley Bronstein
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Stanley Bronstein
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Replied Nov 10 2018, 04:01

@Chris Mason I am not your lawyer, so take my advice accordingly.

I typically advise my clients to use a warranty deed.

In my opinion, quitclaim deeds should only be used to clean up title issues.

For example, you have a potential heir who may or may not have an interest in the property.

They sign a quitclaim deed and the problem is resolved. That's the type of situation where quitclaims should be used.

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Anthony Wick
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Anthony Wick
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Replied Nov 10 2018, 07:55
@Chris Mason I asked my lender if I could move loan into my LLC. They said “no”. So I didn’t. I didn’t want to take a chance or fight a battle since my FHA loan is 30 year fixed at 3.75%.

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Chris Mason
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Chris Mason
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ModeratorReplied Nov 10 2018, 12:24
Originally posted by @Anthony Wick:
@Chris Mason I asked my lender if I could move loan into my LLC. They said “no”. So I didn’t. I didn’t want to take a chance or fight a battle since my FHA loan is 30 year fixed at 3.75%.

You reached the correct conclusion; FHA loans are not Fannie Mae loans, so the guideline in OP does not apply.

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Replied Jan 14 2019, 20:09

Hey all,

Has anyone performed this process recently and, if so, how was the experience? My partners and I are currently in the process of closing on a multi-family home and intend to have the deed changed over to an LLC (to which our lender states is not a problem with their company), however we wanted to verify if anyone had issues with this.

Our lender is also aware of the policy change, having forwarded it to us for our reference that it can, and has been done previously with his company.

Thanks!

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Brit F.
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Brit F.
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Replied Jul 28 2019, 06:43

@Michael Hartpence and others who find this thread, I just wrote a blog post to help people navigate Fannie Mae's Servicing Guidelines, section D1-4.1-02: How to Transfer Property to your LLC without fearing Due-on-Sale

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Replied Nov 15 2020, 20:13

Bumping this thread, as it appears Freddie Mac has finally followed suit, per section 8406.4(b) of their servicing guide.

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Ashwin Goel
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Ashwin Goel
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Replied Jan 4 2021, 15:16

@Ashley H. Thanks for posting. The language is indeed confusing. https://guide.freddiemac.com/a...

In situations where all of the following conditions are met, Freddie Mac will permit a Transfer of Ownership of the Mortgaged Premises:

  • At least 12 months have passed since the Origination Date
  • The transfer is to a transferee who occupies or will occupy the Mortgaged Premises as a Primary Residence and is:
    • -A parent or child of the transferor, or
    • -A grandparent or grandchild of the transferor, or
    • -A brother or sister of the transferor, or
    • -An original co-Borrower of the transferor under the Note, whether or not related to the transferor
  • The transfer is to a limited liability company (LLC) or limited partnership (LP), provided that:
    • -The managing member/general partner of the LLC/LP is the original Borrower. If there are multiple Borrowers, all of them must be members/partners of the LLC/LP, and at least one of them must be a managing member/general partner. If the transfer results in a permitted change of occupancy type to an investment property, such change must not violate the Security Instrument (e.g., the 12-month occupancy requirement for a Primary Residence), and
    • The Servicer notifies the original owner or natural person that the Mortgaged Premises transferred to an LLC/LP must be transferred back to the original owner or natural person prior to any subsequent refinance or modification application to meet Freddie Mac's underwriting requirements
  • The Servicer has complied with all mortgage insurance requirements applicable to the transfer

In connection with any Transfer of Ownership that meets the conditions of this Section 8406.4, a Servicer may not evaluate the creditworthiness of a transferee, require a transferee to assume the Mortgage or otherwise require the Servicer’s or Freddie Mac’s approval of the transfer. However, if the transferee wishes to assume the Mortgage and/or the transferor requests to be released of liability, the Servicer must determine the creditworthiness of the transferee. Refer to Sections 8406.5 and 8406.6 for additional information.

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Ashwin Goel
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Ashwin Goel
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Replied Jan 4 2021, 15:17

@Ashley H. Thanks for posting. The language is indeed confusing. Here is the link: https://guide.freddiemac.com/a...

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Replied Dec 28 2021, 10:08

Good afternoon folks! 

To get this going again, I'm wondering if anyone knows if this is only Fannie and Freddie or if it is across the board now? We have 4 properties but only one of the loans are owned by Fannie and Freddie. One is owned by JP Morgan and serviced by Specialized Loan Servicing, one is owned by Morgan Stanley and Serviced by Shellpoint, one is owned and serviced by Lakeview. They're all kind of sketchy-seeming debt collectors and will not provide me with written permission to transfer title into the name of an LLC. Some customer service reps have verbally told me that "it shouldn't be a problem" but that obviously won't help me if one of them decides to accelerate my loan at any point in the future.

I've seen threads on BP where people talk about having their loan's due-on-sale clauses invoked so I know it does happen. When Fannie and Freddie announced they were going to allow it, I was pretty excited but then neither of them will buy our loans haha. Does anybody know of any federal policy that allows this or if it is just up to the individual company policy of whoever decides to purchase the loan?

We are about to dissolve our 3 LLCs and form a Series LLC to put each house into individual Sub-series to maintain asset liability separation, have one consolidated tax return for the rentals, and only have to deal with one annual LLC fee...but we're wondering more and more if an increase in umbrella insurance is all we would need. I do worry about Insurance companies trying to look for how they're not liable for something and leaving us to pick up the pieces so we're just looking for some advice as there are no clear answers to these concerns.

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David M.
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David M.
  • Morris County, NJ
Replied Dec 28 2021, 13:14

@Blake Cross

Well, I have no new info on the Fannie/Freddie due on sale clause front.  But, you seem to be asking on the subject in general. So...

First, its all about what level of risk with which you are comfortable...

For the Due on Sale clause, there is always the simple solution, to me anyway, is if the clause is called in, just refinance...  Yup, takes a bit of thought, perhaps...

Having a personal mortgage on a property in a LLC still just doesn't seem like a good practice to this layman. I've posted on this MANY times in BP and nobody has presented an argument against. Its just another potential issue with your corporate veil. Also, its a significant "chunk" that is not under the perview of your llC.

If you want the limited liability aspects of the LLC, then you need to use the LLC. Don't "frankenstein" it.. Unless you are investing with non-spousal person(s), there are no tax advantages to it.

As I THINK you maybe alluding.. Many investors use insurance instead of a LLC. Its cheaper. Sure, no insurance company "wants" to pay out, but a reputable one will. Also, if you do your part such as keeping your property in good repair that will strongly mitigate that risk (of course, never entirely).

Like I said, its matter of understanding your risks and being comfortable with them.  Good luck.

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Replied Dec 29 2021, 18:43

Simply refinancing upon receiving a due on sale letter is not so simple. You usually have 30 days either from the date they send the letter or from the date of receipt and refinancing in that short amount of time is too risky. I haven't had a conventional deal close in 30 days or less in two years. At least in my area, getting an appraisal in under 40 days is not happening. My hope of an easy out would be to quitclaim deed it back to my personal name since that is nearly instantaneous. 

It's not bad practice or "frankensteining". If you check Fannie and Freddie's websites, they are both very clear that they approve of borrowers transferring title from the individual into an LLC, as long as the borrower is the owner of the LLC. So there's nothing sketchy or fishy about it. I'm just wondering if all conventional loans that are underwritten to Fannie/Freddie guidelines allow it or not. I've heard that they do but I cannot find it in writing.

Just wanted to poke some people's brains about the transferring title into LLCs with conventional loan buyers that are not Fannie/Freddie.

All of our rentals are short-term rentals so they're much higher risk than a regular long-term rental.

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David M.
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David M.
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Replied Dec 29 2021, 19:53

@Blake Cross

Oh agreed, refinaning isn’t so simple, but that’s how it’s been done to my knowledge.  Of course, you need to be able to afford to in the first place.

Also, just because Fannie lets you do this, doesn't mean it good for your LLC's corporate veil. Seems to come up periodically where investors aren't necessarily checking all angles. Some are claiming up the wazoo because their acccountants says it's okay.. and it sounds like it for an accounting/tax purpose. But it looks horrible from a corporate veil standpoint.

Agreed it was never clear if a conforming loan is good to go on this topic, or one that was specifically result to fannnie/Freddie.  Posters never clarified and nobody else seems to have deeped dived into this

Good luck.
 

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Replied Dec 30 2021, 02:42

Ah, yeah I see what you mean, I honestly didn't think about that. We definitely don't do it for tax reasons. If anything, I owe more taxes with the LLC way because I have to pay Franchise & Excise Tax, which really adds up as you pay down debt. Since we have overnight rentals in the in the Smoky Mountains, my main concern is someone getting drunk and falling off the deck, someone accidentally driving off the side of a cliff from the driveway, or something catastrophic like that, and getting sued for far more than my insurance policy amount. I have a friend that has been sued for a guest falling in the driveway for $300,000 and of course insurance paid that out. But I worry about the $10 million+ lawsuit sending me to bankruptcy because I didn't have title in the name of an LLC.

I suppose I understand that with my liability risk tolerance level with what we do, I prefer to have an LLC. I do sometimes wonder though that without written permission from the owner of the mortgage to transfer title, if I'm a ticking time bomb waiting to receive a due on sale letter, or if it's actually fine since all the loans were conventionally underwritten.

But I understand what you mean regarding having title in an LLC and having the loan not in the LLC will be a target for an injury attorney to try to knock down the veil in the matter of a large suit. I just hope that having an LLC in the first place would deter such a suit and just motivate them to go for a normal insurance amount.