Asset protection and difficulty in loan acquisition

[Graeme Ford]

Hey BP, I have been constantly scouring the podcasts taking notes and educating myself as much as possible. One of the podcasts with Scott Smith #109 he recommends having your properties in an LLC or a trust for anonymity and asset protection. In another podcast Brandon had mentioned that banks tend to be a bit more fussy when looking to lend to a property in an LLC versus a property in the owner's name.

I am wondering why this is the case and what can you do proactively to ensure that this will not be an issue when trying to acquire funding? 

Thank you in advance!!

[Jeff Copeland]

LLC's are great for asset protection when flipping, and/or when you own a property free and clear.

However, if you want to take advantage of traditional residential mortgage financing (and the great rates, low closing costs, and 15 to 30 year fixed terms that come with them), then the financed properties generally need to be in your own name. 

Residential mortgage products are for individuals, not LLCs and corporations, and commercial loan products (which are intended for LLCs and corporations), and not all that attractive compared to residential. 

Those who would suggest nonchalantly that you can just transfer the property to your LLC after closing are not giving you the entire picture. Residential mortgages also generally come with a "due on sale" clause - meaning if you transfer title to the property, the lender can (and in many cases, will) call the entire loan balance due imediately.

This is a constant source of debate here on BP - with many people indicating they get away with it for years and lenders don't care as long as you make your payments...but do a quick search on here for "due on sale clause called by bank" and you'll see it's not all that unusual for the banks to call your bluff. 

One common way the bank finds out is via your insurance company, if you transfer ownership of your property to an LLC, you need to update your insurance (otherwise you leave the property uninsured if you no longer have an insurable interest in it). Your mortgage company is a named insured on the policy, so your insurance carrier/agent is supposed to notify them of any changes or cancellations.

If you look at it from the lender's perspective, you'll see why this matters so much to them: They loaned you a large sum of money, and you pledged your property as collateral for the loan. Then you sold the collateral! That's an obvious problem.  

From a legal perspective, it doesn't matter if you transferred it to your LLC, or sold it outright to a stranger...your LLC is not you, and is not legally responsible for your debts or tied to your personal finances (that's actually the very reason you wanted to use it for asset protection, remember? You can't have it both ways.).

So...in order to take advantage of residential fixed rate financing, you generally have to hold title in your own name, and use insurance coverage (rather than an LLC or corporation) for asset protection. Note that in this scenarios, your insurance carrier doesn't just pay out claims up to your coverage limits...it also has a "duty to defend" and will fight to minimize and settle any claims at the lowest amount possible to protect your (and their) financial interests.