Bank won't lend to LLC, what am I missing?

Question

I was told when talking to guru's that when buying an investment property, to make sure that it is purchased as an LLC and insured as one as well.  From my research (NJ), no bank will lend to an LLC (meaning I cannot put the LLC on the deed) OR allow "or assigned" in the contract of sale....also, the insurance for LLC is about 5X the amount.  What am I missing here?  Please help.

Chris Martin · Answer

I am going to nit-pick on several details. Regarding "FNMA and FHLMC guidelines do not allow you to hold title in an LLC." Technically, this is not correct. The underwriting guideline does not specify how a borrower will "hold title". However, it is a requirement that the loan be in the name of a natural person. But read on...

For a purchase, if the borrower wants the property to be owned by an LLC, the easiest way to accomplish this is to have your closing attorney add a deed to the lending package. The deed will transfer the property from the individual to the LLC. Your attorney (but probably not underwriting) may require a corporate resolution from the LLC for your Capital Contribution (the property) to the LLC. For a refinance, if the owner paid cash for a non-conforming property and now (after rehab) is doing a cash out refinance, and the borrower wants the property to be owned by an LLC, the process is a little different.

First of all, borrower must meet the rules for "Requirements for Continuity of Obligation". Continuity of obligation is met for underwriting purposes when: "The loan being refinanced and the title to the property are in the name of a natural person or a limited liability company (LLC) as long as the borrower was a member of the LLC prior to transfer." The LLC is the only structure recognized by GSEs at the present time. The guidelines say (page 173 under Continuity of Obligation) "Transfer of ownership from a corporation to an individual does not meet the continuity of obligation requirement."

So, if you purchased in an LLC, you can meet underwriting by applying for the loan in your own name. When they (underwriting) realize the property is not owned by you, your or your attorney will cite bullet 3 of the requirements for B2-1.2-04, Continuity of Obligation (06/28/2011). I find it interesting that when my company was doing cash out refis like this, I don't recall the explicit listing of these four exceptions... although we (attorney and I) found two of them in different FNMA/GSE policy statements. The underwriting document was a little smaller back then.

1287 pages of Reference Material.

Regarding "...you can transfer to Land Trust or LLC afterwords but you most likely are violating the due on sale clause in your mortgage when you do this." Per my attorney, if the deed transferring the property to the LLC is done at closing (via your attorney as described above), there is "constructive notice" and implicit "with the lender's prior written consent" regarding the transfer. There is no DOS violation.

But please, discuss this with your own attorney. I am not an attorney.

Account Closed · Answer

In the old days when I borrowed money they did it several ways. 1st you can have it taken out of your llc at close then put back in llc right away after close. The other thing you can try is to have a dun and bradstreet score tied to the llc so it has a separate business credit.
  Experian also has a business credit score system in place. Both of these scenarios are extra work and  require a lot of planning and a little extra money to obtain your acct.  Dun and Bradstreet I am told does not do a very good job anymore of helping you make changes to your acct.  Also you need to ask each of your lenders which they would prefer in order to make your loans happen. when I borrowed in the old days of my business my banker used to say he loved it when i brought him deals because I had basically done the underwriting for him. Learn what each lender you plan to use requires and get it ready ahead of time. LLC's can also manage other llc's in case you wanted to have a basic llc hold a deal during close then have it quit claim to another entity. A lot of lenders now arent going to let you do deals unless you personally guarantee the loan.  At some point you can get no recourse financing but its tricky and your property must have a 2 year history of showing good profits and you should show strong reserves in place as well. Todays rules have changed but the basics are the same they just require you to show you can pay back the loan and are able to handle short falls financially with reserves. LOC's are also still out there for those that can prove there financial ability to pay them back.
   The management of credit had been such a night mare to me over time I have completely washed bankers out of my life. All they do is drag my feet through the mud. I pay cash for my deals now or use hml and owner financing. While its reduced the number of deals I do my profits have expoded. I wish I had done my business this way when I 1st started I would not have been playing such games trying to please bankers when I could be chasing profits instead.
    when you search out bankers find a smaller commericial banker that is whats called a portfolio banker. He will hold his loans in house and isnt subject to the exact same rules as a banker selling your loans to Fannie and Freddie or the market. Portfolio lenders sometimes are more relaxed when it comes to criteria for lending.

Jeremy Bohnett · Answer

@Chris Heeren Following up with you five years later and 1 podcast appearance later. What did you do?

Chris Heeren · Answer

So I read this thread 2 months too late. With all the hype I hear about buying rental properties in an LLC name . . . I cannot believe you cannot get conventional financing through a bank for an LLC. I currently bought my first duplex in an LLC a month ago and got "In House" financing with an adjustable interested rate through a local bank, I was planning on Refinancing with a conventional loan and found out I can no longer do so with an LLC owned property.

What do the experienced Real Estate Investors out there recommend? With today's interest rates do I pull this house out of my LLC and under my own name, then Refinance to lock in the low rates? If so, is a 1M personal umbrella policy enough to cover my person assets against a lawsuit?

Christopher K. · Answer

This is great information, thanks for all your input!  I'm going to followup on the land trust idea, might be my only option right now.

Steve Babiak · Answer

Try this thread:

http://www.biggerpockets.com/forums/50/topics/80428-financing-available-for-your-llc

Tim Delp · Answer

FNMA and FHLMC guidelines do not allow you to hold title in an LLC.  You have to purchase in your own name if you wish to use their financing which is probably 90% or more of what is available in today's market.  As mentioned above you can transfer to Land Trust or LLC afterwords but you most likely are violating the due on sale clause in your mortgage when you do this.  I've never heard of a bank calling a performing mortgage due for violating the due on sale clause as mentioned above.  I'm assuming you want to own in you LLC for liabilty protection as well as anonymity.  For liabilty protection you will have liability insurance through your homeowner's insurance policy and you can always look into getting an umbrella policy.  You can hold property in revocable trust under FNMA and FHLMC so you might look at some sort of trust if you wanted to create some anonymity.

Pat L. · Answer

Just a thought..

Land Trusts are OK in NJ so it may be another avenue ???

buy it in your name, qualify for the mtg then xfer it to the Land Trust, using your LLC as trustee etc etc.

Jon Holdman · Answer

Tough to thread this needle, isn't it?

A few banks will lend to an LLC.  Those will be commercial loans, though, not conventional.  Fannie/Freddie rules prohibit loans to LLCs.  So, if you're looking for 30 year fixed, you're stuck with buying in your own name.

Bank won't lend to LLC, what am I missing?

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