How do Mortgage Payments work after Quit Claim Deed?

[Kevin Abrams]

I am in the process of a refi at the moment. Currently the property is in my name, after the refi I was planning to quit claim deed into my LLC's name. What I am unsure of is how the accounting on that will work. I have an accountant lined up, but I am the kinda guy that needs to understand the whole process. So if the loan is in my name, will I be making payments on the mortgage or will the LLC?

Any advice would be appreciated, thank you for your time. 

[Jeff Copeland]

Make sure you do your homework on this and fully understand the risks and potential pitfalls before making that move. 

I'm assuming you got a conventional residential loan (which are for individuals, not companies) in your own name. Thus, you signed a mortgage note that essentially says "I am pledging this property as collateral for this loan. If I sell the property or change ownership without the prior written consent of the lender, the lender has the option to call the loan due in full". 

This is called the "due on sale" clause in your mortgage. 

Many people will chime in here and say that they do this all the time, they never get caught, and mortgage companies don't care. But if you do a search for "due on sale called" in the BP Forums, you'll see it happens often enough to warrant caution:

But wait, there's more: The due on sale clause is not the only risk. Many people really shoot themselves in the foot from a liability standpoint, which is usually (ironically) one of the main arguments for transferring the property to an LLC in the first place, without realizing it:

You have homeowners insurance on the property, right? It includes liability coverage, right? The insurance policy is in your own name, right?

Guess what, if you transfer the property to ACME LLC, then Kevin Abrams no longer has an insurable interest in the property (you can't insure something you don't own), giving your insurance company clear grounds for denying any claims, thus dramatically increasing your liability exposure. 

Sure, you can just buy a new insurance policy in the name of the LLC, but: 1) It will cost more, and 2) Now Kevin Abrams let his insurance lapse in violation of his mortgage. The insurance company normally notifies the lender of your policy cancellation (since your mortgage company is a named insured on the policy). This does two things: 1) Triggers your mortgage company to procure very expensive lender-placed coverage on the property, and 2) Raises a red flag about the title transfer. 

Finally, most attorneys (and I am not one by the way - so none of this is legal advice, which I suggest you seek) will tell you to never use a Quit Claim Deed. Why would you, when you can just as easily use a Warranty Deed instead?