Forming an LLC and trouble with lending

[Louis Walthall]

So here is the scenario. We own 4 properties. The one we live in. I own 2 rental SF homes and my girlfriend owns 1 SF home that we rent. We are looking to form an LLC for any future rental properties. Together we make around $200,000/year and live in Greensboro NC. Wondering if we would have trouble getting financing for the LLC on future deals. The properties we own all have equity. About 30K in the one we live in, 25K in one, 15K in one, 50K in another. All generate positive cash flow and have very little trouble renting.

Any help is appreciated.

[George Pauley]

Very common question/situation

The root issue is that you will get the best mortgage rates using qualifying Fanny/Freddie loans. The mortgages won't lend to your LLC. Besides you and your girlfriend have a MUCH better income and debt/income ratio and credit score than your LLC anyway. So most folks buy properties in their own name and then move them to their LLCs.

But beware, mortgages have a "due on sale" clause in which states that if you sell the property (e.g. put it in an LLC) then the lender can demand immediate payment in full on mortgage. This is a very real legal issue. That said, I have NEVER met someone this has happened to. (Or even met someone who knew someone this had happened to.) One argument is that the mortgage company knows that if they did try to demand due on sale payment we could just move the house back into our names. :)