Dallas, Texas: Transferring an FHA Loan to an LLC

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Dallas, Texas: Transferring an FHA Loan to an LLC

Cory Dean
Richardson, TX · Member since 2014 · 35 posts · 4 votes

Good afternoon everyone!

Me and a business partner are in the process of forming our LLC, in Dallas Texas, which will own all properties we buy and hold in order to build equity.

Due to low investment capital up front, we were throwing around the idea of my wife and I applying for an FHA loan, in order to take advantage of the low down payment, and possibly transfer this property to our LLC.

Is this something that is done regularly? I mean, I feel like there has to be something preventing a move like this.

I have also found documentation on a quitclaim deed transfer and wondered if this, given that the transfer process to the LLC is doable and legal, is the way to go for transferring.

If the quitclaim deed transfer is not the way to go, but the transfer process mentioned is something that we can do, what method would you suggest for executing the transfer?

Thank you in advance for your time and input!

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y

FHA loans are for owner occupants only...used for rental property acquisitions is loan fraud. If you and your wife will actually live there for more than a year, forget the LLC transfer. And locally, you can generally only have one FHA loan, since they are intended to be owner occupied.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    12y

    FHA loans are for owner occupants only...used for rental property acquisitions is loan fraud. If you and your wife will actually live there for more than a year, forget the LLC transfer. And locally, you can generally only have one FHA loan, since they are intended to be owner occupied.

    1Reply
  • Hattie Dizmond
    Investor · Dallas, TX · Member since 2014 · 2k+ posts · 1k+ votes
    12y

    There are several ways you can handle this transaction, each with its own set of requirements.  Just know, regardless of who you transfer the property to, you and your wife are the only ones legally responsible for the mortgage.  That same mortgage will also appear on your respective credit reports and will factor into any debt to income analysis for future borrowing.  I'm not saying don't do it, just understand that the exposure in this case is all on you and your wife.

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  • Hattie Dizmond
    Investor · Dallas, TX · Member since 2014 · 2k+ posts · 1k+ votes
    12y

    Wayne is exactly right about the fraud on the FHA loan for non-owner occupied properties.

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  • Cory Dean
    OP
    Richardson, TX · Member since 2014 · 35 posts · 4 votes
    12y

    @Wayne Brooks & @Hattie Dizmond Thanks for the response!

    "If you and your wife will actually live there for more than a year, forget the LLC transfer."

    Question for Wayne: We discussed living there for a year then doing the transfer, yes. What exactly do you mean "forget the LLC transfer" ?

    "There are several ways you can handle this transaction, each with its own set of requirements."

    Question for Hattie: Do you happen to know off the top of the head, or know of a specific resource, I can see these ways you're talking about?@Hattie Dizmond

    Also, we weren't looking to do this for every property we invest in. We were only doing this for the first investment property, so we could start generating cashflow to circulate back into the LLC to invest in another property.

    Either way, thank y'all again for taking the time out and helping out a newbie! :)

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  • Hattie Dizmond
    Investor · Dallas, TX · Member since 2014 · 2k+ posts · 1k+ votes
    12y

    Cory...I missed the FHA part the first time. FHA has owner occupancy requirements, as pointed out by Wayne. You didn't indicate whether you had a property targeted yet, so I'll assume you don't. You also didn't indicate whether you were targeting properties that needed work or they will be rather turn-key in nature. There are a lot of considerations. However, if you are looking to get into a property with low down requirements and have reasonably good credit, I would suggest you shop local lenders. (Small local banks and credit unions) These guys have their own in-house underwriters and - generally - much less stringent requirements. You may even, with a personal guarantee, be able to actually finance the property in the name of your business. This will allow you to begin building the credit for the LLC, which should be your long-term goal...having the LLC finance the properties. Again, this is all much easier to do with a smaller, local lender.

    Also, HUD Home Path might be an option, if you are open to doing some work on a property. I believe Home Path only has a 90-day hold requirement, before the property can be transferred.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    12y

    There's no real business benefit to transferring to an LLC, only some asset protection benefits, which are debatable.

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  • Cory Dean
    OP
    Richardson, TX · Member since 2014 · 35 posts · 4 votes
    12y

    @Hattie Dizmond Thanks again!

    A lot of useful information. 

    We don't have a property already targeted at this point and I do want to go through a credit union for financing.

    I figured before I start to look at properties, I would talk to the credit union of our choice to see what price range they felt we would qualify for. Hopefully, we can qualify for a property that is relatively turn-key.

    As far as HUD Home Path, I will certainly look into that.

    Thanks again!

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    12y

    It's FNMA Homepath, for FNMA owned properties only. 

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  • Jake Kozul
    Real Estate Investor · Grand Rapids, MI · Member since 2014 · 85 posts · 13 votes
    12y

    Cory, I am have been a loan officer for 8 years and investor for 5. I did something similar to what you are doing, but with a multifamily with established cash flows earlier in the year.

    I acquired a 4 unit property, using FHA financing, I live in one unit, rent out the other three while having an established LLC to distribute cash flow.

    What you are trying to avoid is the "Due on Sale Clause" of the mortgage. Go to this link if you would like a more comprehensive explanation of the "Due on Sale Clause"... http://www.creonline.com/beat-the-due-on-sale-clause.html .

    In my lending career, I have dealt with countless homes that are deeded to to a trust or other entity, and other than having to deed the property out of the trust's or entity's name back to yours' (and then, back into the entity's after the transaction) in a transactional situation, the bank does not seem to care. Now I have not checked into why that is frankly, but I have dealt in enough of these transactions, and have kept in touch with enough clients through the years to know that the bank or any other agency has not come knocking at their doors. 

    I would suggest once you get past the one year of tenancy, deeding the property to another entity should be discussed with an attorney, but is something I am confident you can do in some capacity.

    1Reply
  • Anthony S.
    Rental Property Investor · Jackson, MS · Member since 2016 · 3 posts · 1 vote
    8y

    Thanks @Cory Dean for exactly the question I wanted to ask! 

    How did things turn out? What transfer method did you use? Did it matter that the LLC was established before you bought the property originally?

    @Jake Kozul thanks for you on point answer! Is it still the case that banks aren’t enforcing the Due on Sale clause? Is there a way to double check with the bank beforehand that they won’t enforce it? What transfer method would you suggest?

    @Hattie Dizmond, what is the significance of whether the property he wants to purchase needs rehab or not? Does that change the likehood of getting approved, or of being able to transfer the property? 

    And what are the pros/cons of using a Home Path loan vs one insured by the FHA?

    Thanks everyone! 

    AJ

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