Lenders and LLC's - Oil and water?

Question

I've been reading through several forum threads and a common thing that I've been seeing seems to be that lenders won't lend to LLC's for SFR or MFR (Duplex or Triplex) but only for commercial. Is this correct? If that's not right then what nuance am I missing? If this is correct then I have a couple questions:

1.) How do people deal with having multiple mortgages without hurting your personal credit or laudability?

2.) What would be the typical workflow to get the property in your LLC? Is it to personally purchase a property, then let it 'season' for 6 months and THEN purchase the property from yourself through your LLC?

I'm trying to build my starting strategy and trying to figure buying the property in my name or through an LLC into my acquisition plan. Thanks for any input you can give :)

Chris Martin · Answer

For 'traditional' investment mortgages, originated through a bank and underwritten by a GSE (e.g. Fannie Mae,) just put them in your own name. That's the easiest route. If you absolutely are dead set on putting the asset in an LLC, then (as I have posted elsewhere many times) have your closing attorney draft a second deed that is part of the closing package that will deed the property from you to your (single member??) LLC. You need to coordinate with your attorney before hand. Have a sit down meeting and explain why you want him to put the property in the LLC. Then have the attorney "own" the idea that the LLC holding the property is best for the client (you). BTW, this second deed does not violate any current GSE underwriting that I am aware of. I only looked for about 10 minutes in the latest but I can tell you that my membership (in our LLCs) have done this process before for cash out refis and originations. Underwriting may (most likely will) initially balk, but the reality is the loan is originated with your personal guarantee and in your personal name, and the transfer (per my attorney -- get your own to confirm) is de facto written Lender consent because they funded the closing package. This is where your attorney may step in and defend the entity selection... it's between your attorney and their underwriting (note 1.) The personal guarantee is there. That's what single family underwriting wants. The irony is that on he GSE Multifamily (5+) side, underwriting will most likely question the contract if your don't have an LLC as the buyer.

Note that my attorney believes the NC Banking Commission would rule this way, your state may have other regulatory and case history that your closing attorney can investigate. Note well, too, that the loan is originated as a non-owner occupied property.

Good luck. We have not had any issues in 15+ years. No DOS issues, etc.

My disclosure: I haven't and my members haven't done a government subsidized (e.g. GSE) SF loan in a decade. We only work with commercial lenders, regardless of the asset class (SF, MF, Land, Commercial Development, etc.)

Note 1. I can see my attorney (in pit bull fashion) asking the underwriter for the specific section of the FNMA guide that identifies this as an issue... good to have an attorney that specializes in real estate law...

Note that my attorney believes the NC Banking Commission would rule this way, your state may have other regulatory and case history that your closing attorney can investigate. Note well, too, that the loan is originated as a non-owner occupied property.

Good luck. We have not had any issues in 15+ years. No DOS issues, etc.

My disclosure: I haven't and my members haven't done a government subsidized (e.g. GSE) SF loan in a decade. We only work with commercial lenders, regardless of the asset class (SF, MF, Land, Commercial Development, etc.)

Note 1. I can see my attorney (in pit bull fashion) asking the underwriter for the specific section of the FNMA guide that identifies this as an issue... good to have an attorney that specializes in real estate law...

Joshua Fulenwider · Answer

@Michael Perry  I think @Chris Martin did a great job explaining the GSE information.  I wanted to address one of your other questions.

By doing commercial loans rather than GSE loans you can avoid having these loans show up on your credit report.  The majority of commercial lenders DO NOT report commercial loans to the credit agencies.  Currently, I believe you can only have 4 traditional mortgages per FNMA rules (but it's been a while since I checked on that).  With commercial lending you can have unlimited.

For your starting strategy it may be easier to qualify for a traditional mortgage (GSE) than a commercial loan just because you don't have a history (I am assuming) of property investment.  Your first one establishes you and you can then point to that when you approach commercial lenders later.

Hope this helps.  Let me know if I can be of further assistance.

Chris Martin · Answer

#1. FNMA SF (Single Family) will only lend to people, real humans, not entities like an LLC. An LLC is not required for renting property. There are pros and cons for each and you can search on BP for the hundreds of topics on if an LLC is a necessity.

#2. My membership would buy with GSE money if we could, but the government programs limit the number of loans you can have. Besides, our LLCs are multi-member and have been doing business with the same commercial lender for about a decade. They will work with us (within limits) on special situations that would most likely not be possible with other lenders. So, yes, it's generally the path of least resistance for us.

Michael Perry · Answer

@Chris Martin Is there additional difficulties or hurdles with a multi-member LLC? I was planning on doing an LLC with my wife as a partner...

Chris Martin · Answer

The 'bank' isn't really making the call. The 'bank' just originates and sells to a GSE. In the cases I have done (note: past tense), the underwriter may have exchanged emails with the closing attorney but the loan was approved and the deed recorded. The loan is in the name of a person, not an LLC. If you can find a stipulation in the Fannie Mae selling guide to the contrary, please post it. As I stated, I haven't done a FNMA loan for quite a while, but I can't see any regulation or underwriting guideline to contradict what I've posted.

I guess, too, I need to stress that your closing attorney needs to be on board, since an underwriter can push back. But unless there is some restriction, I can't see them denying the loan. Hey, worst case is that you need to keep it in your own name. Unless you have a multi-member LLC setup, it's probably not an issue.

Michael Perry · Answer

@Chris Martin Thanks so much for explaining! :)

Michael Perry · Answer

@Chris Martin Thanks for this, this was helpful. Can I ask a couple follow up questions if I may?

1.) You mention I should really just put these traditional mortgages in my name but if I'm absolutely dead set on an LLC then I can consult a lawyer to do something similar to what you laid out above. Why would the LLC be the last option and in my name be the first option in your opinion? Is this purely due to the loan type? i.e it's just so much easier for a traditional mortgage in an actual persons name however commercial or private money an LLC is easy as well?

2.) You mention you only work with commercial lenders even within the SF asset class. Why do you only work with commercial lenders, what advantage do you get from that? Or is it that you just have a good relationship with the ones you work with so you just do everything through them?

Thanks again Chris!

Lenders and LLC's - Oil and water?

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