Does the name on mortgage need to be changed to protect liability

Question

Hey Everyone!

New Investor here in Charleston SC!  My wife and I are in the process of converting our primary home into a rental.  I have created an LLC and plan to transfer the property title to the LLC.

My question is this.  If we do a quit claim deed to transfer the title of the property over to the LLC, would the the mortgage still being in my name defeat the point of this? Would a lawyer still be able to pierce the veil because the mortgage is in my name?

Apologies if this is a repeat question, I looked through the forums and found plenty of questions regarding LLCs, but not this exactly.

On a separate note, looking to network with other real estate investors in the Charleston area! Feel free to reach out!

Joe Splitrock · Answer

No worries, I have probably told a couple hundred people about the change over the last few years. It is in the loan servicing guide and the change took place for Fannie Mae loans after June 1, 2016. Not sure on Freddie Mac, but think it followed within a year. The conditions are pretty straight forward.

From the loan servicing guide:

• Notes: For all such transfers affecting mortgage loans purchased or securitized by Fannie Mae on or after June 1, 2016, the transferee is not required to occupy the property.
• 
• a limited liability company (LLC), provided thatthe 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).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.
• 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).
•

• 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).
•

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.

https://servicing-guide.fannie...

Buddy Holmes · Answer

@Tom McMahon

I will leave the legal question up to a legal expert.  I dn't think you mortgage holder will allow a change to your mortgage.

They want a person with a credit score and history on the hook to pay them back.  I have had up to 10 SFR w/o going to any LLC to protect liability. You can buy a liability policy with less effort than the LLC route IMHO.

Cheers, buddy

Joe Splitrock · Answer

@Troy Gandee you are working on out of date information. Fannie Mae and Freddie Mac both made changes to loan rules about five years ago and the now allow transfer ownership to an LLC under certain conditions. This will not trigger "due on sale" clauses. One of the big conditions is that the majority owner of the LLC needs to be the same as the person(s) that have the loan.

Tom - The property ownership transfers, but loan stays in your personal name. They don't care that you are transferring ownership, because you retain majority ownership and you remain personally liable for the loan. They will not allow you to transfer the loan into an LLC. You can sometimes write loans with an LLC, but the LLC needs credit and it is a different type of loan (commercial). Even if you write a commercial loan, you may still hold a personal guarantee on the loan.

Whether there is any point/benefit in transferring the property to an LLC is the more important question. My guess is probably not, especially if you are self managing. You have the property in an LLC, but loan day to day management in your personal name. It could be argued that you are personally not separate from the LLC.

The other issue is maintaining an LLC requires time and costs. You have to document meetings, rules and do a little extra at tax time. There are some fees to maintain an LLC. Many people don't properly run LLC, so they have an illusion of security more than actual security.

My best advice is have good liability coverage limits on your insurance. Most importantly, reduce risk every way possible. Fix broken hand railings, don't allow swimming pools or trampolines, etc. Removing risk is prevention and is better than having a lawsuit.

Tom McMahon · Answer

@Joe Splitrock

Now that’s the answer I needed! Thank you so much for the detailed response!  Good to hear they will allow it, but again I’m not really seeing the point.  I can’t imagine it would be hard for a lawyer to prove in court that my single member LLC and I are separate entities and I am not responsible for the “company’s” negligence.

Looks like a lot of paperwork that doesn’t truly achieve anything.  Guess the right plan is to get insurance, and just be a good landlord. Go figure.  Glad I did asked.

Thanks guys!

Troy Gandee · Answer

@Tom McMahon The lender will tell you not to do it. A quit claim deed is technically a "change in ownership", so the lender could call the note. I've never heard of it actually happening, but it could appear to the bank as though the home has been sold and they will expect their payoff. They loaned that money to you, not the LLC, so they'd prefer you keep it in your name. You'll want to consult with an attorney, by imo, it is usually not necessary to put the property in an LLC at this point. If you have good insurance and aren't negligent, you shouldn't have any liability issues. Once you have more assets to protect, that's when you should start worrying about rearranging things yet. If you really want to get crazy, you can try to go the trust route as it can be a workaround for the mortgage issue, but it's pretty complicated for 1 rental.

Bill B. · Answer

The reason I went with an umbrella instead of an llc is I was of the opinion your are at least 10x more likely to do something personally to get sued than your property is. If you get in at fault car accident or you fail to maintain your property or your rental, if your dog bites someone, etc etc. You own the LLC so you are sued and they get your LLC and everything it owns. You want the insurance company’s lawyers fighting the lawsuit to defend their million(s) of dollars not just paying out the lower limit and letting you pay the rest.

Spencer Gartz · Answer

@Tom McMahon

The method that I’ve always been a fan of, and not sure if it works in every state…

You hold the properties in your name, and open a management Llc or other entity to operate them. This way if someone slips on ice, or another liability issue happens, the management company is liable, who owns nothing.

Remember, with liability, you can’t 100% prevent being sued and losing. You just want to make sure you aren’t providing the opposing party with a slam dunk. You want to set it up so that an attorney looking at the case wouldn’t ever take it on contingency.

Troy Gandee · Answer

@Joe Splitrock very interesting! Thanks for sharing!

Troy Gandee · Answer

@Joe Splitrock that’s definitely the first time I’m hearing of that. Good to know. Seems like more people should be aware of that, if so. I’m doubtful that it’s as easy as it may seem, though.

Tom McMahon · Answer

@Troy Gandee

Appreciate the input Troy.   Seems like this is more trouble than it’s even worth, and I even if the mortgage company will allow it, I can’t see how it would be hard to pierce.   I will probably end up going the easier route and just taking out an umbrella policy.

I saw that your company hosts those REI meet ups here in Charleston, so look forward to meeting you soon!

Does the name on mortgage need to be changed to protect liability

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