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

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

Chris MasonPro Member
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

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.

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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Andy Mirza
Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
8y
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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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    4y

    @Blake Cross
    yeah, maybe the LLC will deter people. Heard a bit of both. some walk away, some find it a reason to dig into it since they are used to piercing the corporate veil and figure you have more assets to go after. Otherwise, why else did you form the LLC in teh first place and what is it you are trying to hide/protect.

    Semi-rhetorically, how are you making your mortgage payments? From your LLC's bank account? From you personal bank account? Then, how are you handling the deductions, if any, on your tax return? We've had long discussions on this before on BP... You can do more "accounting-wise" (sort-of) than you can "legally" to protect your corporate veil.

    Those kinds of super high lawsuits are a pain in this country for sure. Make sure you do your due diligence to mitigate / disclose the risks (I know know, maybe have them sign waivers...). Make sure the insurance compnay knows. remember, its really their job to evaluate the risk properly to make money. Probably good idea for the LLC to also have an umbrella policy. THat's easier/cheaper with one LLC since you'd only need the one policy, but not sure how that works when you have a Series LLC. Anything to keep the insurance company engages since you need them to handle the lawsuit otherwise you'll go broke on legal fees to defend your LLC and its potentially meager assets (generally depending on how heavily leveraged you are at the time).

    I was just relooking at your post.  Did you originate your loans with JP Morgan and Morgan Stanley?  The latter I didn't think did retail/residential lending.  I'm wondering if both own the Notes because Fannie/Freddie securitized the Notes and sold them off.  

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