How to transfer loan from individual to LLC

[Sharad Bagri]

If we purchase a property with a a loan on an individual name and then transfer to LLC. How does the transfer work?

The doubts we have are

1) There is a due on sale clause or something that doesn't allow the loan to be transferred to an LLC? How seriously is it enforced

2) Who will do the transfer, do we have to tell to the lender or the bank? or someone else like CPA etc. should initiate the process?

[Kevin Sobilo]

@Sharad Bagri, I think most people would simply have their lawyer prep and record a quit claim deed.

I don't think most people notify their lender. Yes, the lender could use the "due on sale" clause to make the entirely of the loan immediately due. In that case you could be forced to refinance, I suppose. As long as you make your payments this sounds extremely unlikely from what people have said.

Keep in mind that most residential mortgages are conforming loans that are resold on the secondary market and bundled into mortgage backed securities. When managing the "security" this mortgage is a part of they probably have a strategy for how to manage that is based on keeping a stable known risk for the security.

If they started proactively doing things like calling a loan due, the introduce higher risk of foreclosure. Even if they force you to refinance, the security makes LESS money because the loan is paid off and you are no longer paying the interest they expected. 

[Corby Goade]

You typically can't change the responsibly part on a loan, you'd have to refi. 

I think you are referring to the deed. As mentioned above, you can quit claim ownership of the property, but you are right- lenders don't like that. 

It's not common that loans in good standing are called due, but it does happen, regardless of what people tell you. It's possible and I personally know people that this has happened to. But full disclosure, I've done it myself many times too. 

[Tom S.]

@Sharad Bagri Lots of people say "as long as the payments are being made on time, the lender won't care." But you'll have to change the insurance to the LLC, and the lender will be notified. I disagree, I had a time when my name and the name on the insurance didn't match and the lender was all over it, regardless of the on-time payments.

Your best bet is to refi into a commercial loan that allows the LLC (if you've already purchased the property), or close directly with a commercial loan / DSCR loan.

[Sharad Bagri]

Quote from @Kevin Sobilo:

@Sharad Bagri, I think most people would simply have their lawyer prep and record a quit claim deed.

I don't think most people notify their lender. Yes, the lender could use the "due on sale" clause to make the entirely of the loan immediately due. In that case you could be forced to refinance, I suppose. As long as you make your payments this sounds extremely unlikely from what people have said.

Keep in mind that most residential mortgages are conforming loans that are resold on the secondary market and bundled into mortgage backed securities. When managing the "security" this mortgage is a part of they probably have a strategy for how to manage that is based on keeping a stable known risk for the security.

If they started proactively doing things like calling a loan due, the introduce higher risk of foreclosure. Even if they force you to refinance, the security makes LESS money because the loan is paid off and you are no longer paying the interest they expected. 

Thanks for the behind the scenes details also. Great info.

[Trevor Finn]

Great questions @Sharad Bagri!

1. The due-on-sale clause technically allows the lender to call the loan due if you transfer to an LLC, but enforcement varies. Many investors do this and don't see issues, but it's best to proceed carefully and know there's some risk.
2. You don’t necessarily have to inform the lender, but it's wise to consult a real estate attorney or CPA to guide the process and minimize risk. They can ensure it’s done properly and provide advice on your specific situation.

[Ko Kashiwagi]

Hi Sharad,

From the sub-to investors that I've talked to who've done many deals, I rarely see it being it enforced. However, if you have a reason to refinance (lower rate, more cash out) then it would be a much safer bet to get a DSCR loan and refinance into your LLC. Ultimately, it's up to the investor to take that risk.

Title is the one doing the title change into your LLC, but if you are doing this through a refinance, the lender/broker helps you and takes care of it

[Erik Estrada]

Why not just buy the property with a traditional DSCR loan and avoid the complication?

[Scott Allen]

@Sharad Bagri Speak with the title company that helped you close the deal and ask if they can have their real estate attorney help you do this. It's very common to do. 

It's also common that a lender makes you close in your personal name for a conventional loan then the deed is quit claimed into an LLC.

A real estate attorney helps you do this. The title company you used most likely will have one that can help you do it. If not, reach out and I can send you some referrals. 

[Inderpreet Singh]

Quote from @Scott Allen:

@Sharad Bagri Speak with the title company that helped you close the deal and ask if they can have their real estate attorney help you do this. It's very common to do. 

It's also common that a lender makes you close in your personal name for a conventional loan then the deed is quit claimed into an LLC.

A real estate attorney helps you do this. The title company you used most likely will have one that can help you do it. If not, reach out and I can send you some referrals. 

 Do you have an attorney in MA that you believe can do the Quit Claim deed?