LLC, Quit Claim Deed, and Due-on-sale implications

[Josh Bloomquist]

I acquired a SFR recently and would like to transfer it to an LLC for added liability protection of my personal assets. Before closing my lender told me I would simply need to do a Quit Claim Deed to transfer the property to my LLC...no problem. After closing (unfortunately) my attorney told me to get a letter from the lender giving me a release to go ahead and do the quit claim deed. I went back to my lending agent and asked for this letter and after reaching out to his superiors he was told that because the loan is held by Fannie Mae/Freddie mac they would be forced to invoke the due-on-sale clause if I did a quit claim deed on the property.

In the end I've beefed up an umbrella policy I have, but my question is whether this is a common problem people have when putting rental properties into LLC's? Everyone I've spoken to (including real estate agents and another lender) tell me that there shouldn't be any problem with quit claiming the property into a n LLC and it would NOT invoke the due on sale clause.

Will lenders write the loan with my LLC to avoid this the next time? Any insight is greatly appreciated.

[Matthew Kreitzer]

Generally speaking, a due-on-sale provision is enforceable as written in the terms of the loan. There are very few protections against due-on-sale enforcement. There are two sources of due-on-sale restrictions in home loans; Federal Law and State Law. For an analysis of your state's laws you should speak with an attorney in your state for more information, or the state whose laws govern the loan agreement.

For information on the federal restrictions for due-on-sale clauses, read https://www.law.cornell.edu/uscode/text/12/1701j-3. This is the federal statute that creates exemptions for due-on-sale transfers. Given that I am not licensed in your state, I cannot applies these laws to your facts to tell you whether you have a case. However, you should speak with a local attorney.