Getting loans to a LLC, small banks vs secondary market

[Scott Peace]

Hey all, I am a newer investor in Lexington KY. We have a quad we bought about 3 months ago with a conventional 30 year loan. We formed an LLC but still haven't had time to quick change it over. In the meantime, we recently put two townhomes under contract and while I am getting my funding secured, I am hearing two different things. I hear from my money people that we can't get a conventional loan if we have a LLC. Is that true? This is a mortgage broker and a smaller local bank that will also go out on the secondary market. I have worked with both before. Anyone have experience with this? What happens if we buy the houses in our name and then transfer them to the LLC? Thanks, Scott

[Edward B.]

@Scott Peace,

Yes it is true that you cannot get conventional financing because it is a business entity, not a person. It is one of the biggest issues with investing in an LLC, the rates and terms available to the business are not nearly as favorable as conventional financing.

Nicholas is mostly correct except that you don't "trigger" a due on sale clause, you violate it. That essentially puts the ball in the lender's court. They now have the option of accelerating your loan and calling it due. Here is the reality, though, they rarely do that, it is just not in their best interest. BUT, and this is a big but, they can do it. What's more, they can do it at any time. There are stories on BP of people having their loan called years after transferring it. Personally, I have done it and have not had any problem for almost 10 years. The point is, if you are not prepared to cover the loan (i.e. pay it off or refinance it) then it may not be worth the risk, you will have to decide that. I have also heard where the lender simply told them to put the title back in the borrower's name and all would be fine. They don't have to do that though.