No Due on Sale for Fannie Loans to LLC?

Question

Hi Lending Specialists! I was talking with a lender today and he was under the impression that loans processed through Fannie Mae’s Desktop Underwriter (DU) would not be subject to the dreaded due on sale clause if the mortgagee were to deed the property into an LLC or trust. Does his statement hold water? Are there any other details he didn't mention that I should know about?

Thanks!

Wilson Pun · Answer

Yes, transferring title from an individual borrower to an LLC controlled by original borrower is exempt from Due on Sale- D1-4.1-02 of the Fannie Mae servicing guide, allowable exemptions-

a limited liability company (LLC), provided that

• the mortgage loan was purchased or securitized 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).

Joe Splitrock · Answer

The mortgage still remains in your name. In other words, anyone can search out public records, find out you own it and sue you. It is hard to claim separation from a property whey you hold a personal mortgage for it. The point others are making is that the LLC may be useless for asset protection.

I am also not sure how that works for tax purposes. The income will flow through the LLC, but the mortgage interest is a personal expense. Maybe it is fine since you are 100% owner, but that would be worth talking to a CPA or tax professional.

Bill Crow · Answer

@Michael Myers

Look carefully at the “and” in that statement.

Michael Myers · Answer

Thanks @Bill Crow, I’ll do some more digging before I jump right in!

Bill Crow · Answer

Michael, I apologize. I should have been clearer about which "and" I was referring to. It's the one in the middle of the second bullet. If the LLC is owned by the original borrower AND the transfer results in a change of occupancy type....  That could be interpreted to mean that the transfer to an LLC passes DU only if both criteria are met. May want to dig further into that if it applies to you.

There are a number of other threads discussing the level of risk involved when transferring ownership of property financed under a conventional loan from an individual to an LLC, with a wide variety of opinions on the due on sale issue.

Michael Myers · Answer

@Bill Crow, do you mean the and that separates the bullet points? Or the and before the change in occupancy type? Either way, I don’t plan on purchasing any new properties before 2016 and they will be investments from the outset, so no change in occupancy type.

Michael Myers · Answer

@Wilson Pun, thanks very much, exactly what I was looking for!

No Due on Sale for Fannie Loans to LLC?

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