Hello. I purchased my first rental property in February in Spokane, WA. I secured the loan in my name and formed an LLC that I wanted to put the property in. I happened across an article on the internet regarding an "escalation clause" that some lenders have in loan terms. It means that if you transfer the name of the title, then the entire balance of the loan is due immediately. This meant that if I wanted to change the title on my house to my LLC's name I would have to pay off the loan in order to do so. I contacted my bank (credit union) and asked my mortgage specialist if this clause was in my loan. She didn't know but asked her supervisor and they discovered that yes, there is an escalation clause in my loan. She told me that the clause is buried so deep in loan rules that most real estate lawyers don't even know it exists. She said Fannie Mae, Freddie Mac, US Bank, and other lenders have the clause.
I am looking to purchase another property soon. A friend who has dozens of properties, all in different LLCs, told me I will need to form an LLC and apply for a commercial loan under the LLC's name in order to get the title in the LLC's name.
Has anyone else come across this issue? Is there a way to get my first rental into the LLC without having to pay the loan off immediately or refinance?
Also, is the information my friend gave me about getting a commercial loan in the LLC's name accurate?
Any information is greatly appreciated.
I came across this information when I was doing some research on the internet. It might help..
HOW TO GET AROUND THE 10 FINANCED PROPERTIES RULE
I work with many investors and have came up with a game plan that works well for someone that is buying and building a portfolio of rentals. The game plan revolves around how to continue getting Fannie Mae loans once you have hit the 10 financed properties limit. I had a conversation with underwriting with my company and was given the actual Fannie Mae guideline on this and what is acceptable versus what wont work.
In a nutshell, here is the answer. Fannie Mae views a LLC differently than a SUB S or a C Corp as far as holding and financing properties. If you own more than 25% of an LLC and even if you went and got commercial / portfolio financing on the properties in the name of the LLC , they would still count in Fannie Mae's 10 financed property rule.
However if you hold them in an SUB S or a C Corp and you get commercial or portfolio financing in the name of the company, even if you have to sign a personal guarantee on the loans, Fannie Mae will not count those properties in the 10 financed property rule. Why, because they are commercial and the loan is in the name of the company. An LLC tends to be a pass through entity, so its structured differently.
So with that said, I would plan to buy the properties and hold them in your personal name. When you get to property number 9 or 10, then think about moving the property that you have the lowest balance on, or the most equity to a SUB S or C Corp. Then go secure commercial or portfolio refinance on those 1 or 2. By doing this, you will open up 1-2 slots available for Fannie Mae purchases going forward. Rinse & repeat to as many properties as you could ever want to buy.
Fannie Mae has the best overall loan terms compared to all other loans, so that is the reason that you want to always buy using Fannie Mae.
You need someone on your team that knows the needs of investors and the challenges that they face. The more someone knows about how to structure a deal, the more options they can give you and the more headaches and money they will save you.
This came up on biggerpockets many times. This is just my opinion here, as I'm not an attorney, but technically, you are correct. That said, I never heard of people who transfered the ownership to LLC and got asked to pay off the loan. I do heard that the first 6 months, you may want to keep under your name, but I'm not sure how true this is.
Not saying it's wrong, but your friend is taking a super conservative approach.
If I were you, I just get a loan under your name, and just Quitclaim it to your LLC, but again that's just my opinion.
Filing a quick claim will always be terms for the due on sale clause in almost every mortgage, but very few will ever attempt this. In most cases if you speak with the bank about this many people have done this. I mentioned wanting to do it to my mortgage company before signing for the mortgage and they told me that they would require the paperwork showing the principles have not changed meaning I can't have the LLC with multiple names not on the original loan but that if I as a person quick claimed to an LLC that I was the principle of there wouldn't be an issue. Of course none of that means anything unless it is written into the mortgage but knowing the policies from your lender can help.
It isn't unusual to want to do this, and the banks just want to ensure that you aren't using the LLC as a cover to sell the home to another party.