Transfer deed, retain mortgage, without due-on-sale
Investor · Kansas City, KS · Member since 2021 · 24 posts · 5 votes
Transfer deed, retain mortgage, without due-on-sale
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Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
1y@Brandon Bell, a few things to consider:
1. You aren't going to be able to transfer the mortgage to an LLC. Most mortgages aren't "assumable" (able to be transferred) and even if it is the new borrower would need to qualify the same as the original borrower. Since the original loan was apparently for a primary residence an LLC could never qualify because it isn't a person who would owner occupy the property.
2. Subject-To is for giving someone who would not normally have control over the loan control over it. That would not apply to you since you are the original borrower and also owner/member of the LLC.
3. Many people just transfer the deed and NOT notify the lender. In most cases the lender will take no action so long as the mortgage stays in good standing.
4. If the due on sale clause was triggered you simply need to be prepared to refinance into a new loan.
5. If the risk of having to refinance into a new loan is a big deal for you, then you might consider simply operating in your own name without an LLC.
An LLC offers some liability protection, BUT states vary with the cost to get and maintain an LLC. If your state is an expensive one it might be cost prohibitive to have an LLC for a small rental business.
Also, an LLC only offers you protection if you use it correctly! If you don't use it correctly, then you will be able to be sued personally and your personal assets will be at risk anyways.
So, many people choose to operate in their own personal name but buy an additional umbrella policy to protect themselves from liability.
4 Replies
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes1y
@Brandon Bell, a few things to consider:
1. You aren't going to be able to transfer the mortgage to an LLC. Most mortgages aren't "assumable" (able to be transferred) and even if it is the new borrower would need to qualify the same as the original borrower. Since the original loan was apparently for a primary residence an LLC could never qualify because it isn't a person who would owner occupy the property.
2. Subject-To is for giving someone who would not normally have control over the loan control over it. That would not apply to you since you are the original borrower and also owner/member of the LLC.
3. Many people just transfer the deed and NOT notify the lender. In most cases the lender will take no action so long as the mortgage stays in good standing.
4. If the due on sale clause was triggered you simply need to be prepared to refinance into a new loan.
5. If the risk of having to refinance into a new loan is a big deal for you, then you might consider simply operating in your own name without an LLC.
An LLC offers some liability protection, BUT states vary with the cost to get and maintain an LLC. If your state is an expensive one it might be cost prohibitive to have an LLC for a small rental business.
Also, an LLC only offers you protection if you use it correctly! If you don't use it correctly, then you will be able to be sued personally and your personal assets will be at risk anyways.
So, many people choose to operate in their own personal name but buy an additional umbrella policy to protect themselves from liability.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes1y
Kevin did a great job explaining why you shouldn’t bother.
I'll add that you aren't going to move the debt to the LLC, that's going to still be on you. You also aren't going to move the liability, that's still going to be on you. Anything that happens at your rental is going to be your fault. So they're going to sue you and the LLC. Just get an umbrella and keep the home in your name.
You are only adding complications and costs with the LLC with no upside
This is all assuming there’s been almost zero appreciation and you shouldn’t sell tax free while you have the chance.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
My feedback is do nothing. Leave it in your name, get a new insurance policy and call it a day and rent it out
7e investments53 Reviews - 1yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesThe previous replies stated answers to your questions, but some of the answers may not have been clear.
Quote from @Brandon Bell:
I've owned a property for four years with a standard fixed-rate mortgage, and now I'm looking to convert it into a rental. My goal is to transfer both the deed and the mortgage to an LLC. My main concern is how to avoid activating the due-on-sale clause when transferring the deed. I'd like to keep the current fixed-rate mortgage in place and, if possible, have the debt transferred to the LLC as well. Any advice on how to navigate this?
I’d appreciate any feedback from those who can offer advice, but I’m also curious about what specific type of attorney or local resource I should reach out to for guidance.
I’ve seen references to the Garn-St. Germain Act and using a trust for subject-to approaches that may work for this kind of transfer, but I’m not sure it totally applies to my situation.
1. The debt can not be TRANSFERRED to the LLC. The LLC can sign an agreement with the debtor (mortgagor, that’s YOU) accepting liability for the debt, but that’s only between the two parties involved in the agreement. You remain liable to the note holder.
2. The St Germain Act states that state governments can NOT outlaw due on sale clauses except for transfers from an individual to a revocable living trust. Since the trust is a disregarded entity, the benefit is bypassing probate, not tax issues or liability concerns.
So, transferring title to an LLC is a transfer as defined by most mortgage or deed of trust documents as a trigger of the so called due on sale clause.
From a practical viewpoint, I wouldn’t think the lender would accelerate the note, if the LLC were a single member LLC, you were that member, and it was treated as a “disregarded” entity for tax purposes.
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