Quit Claim to My LLC / Who Pays Mortgage?

Question

I have a property in Cincinnati OH that I owned in my name and got a residential loan for in my name. I've owned the property in my name for about a year and I just did a quit claim to transfer the property to my LLC that I created. My question is who pays the mortgage now? Do I pay it out of my LLC's bank account or continue paying out of my personal account. I understand the liability limiting aspect of an LLC is ruined if you "pierce the corporate veil", so I want to make sure to avoid that. The LLC is owned solely by me and is a disregarded entity.

Also, if I need to keep paying it out of my personal account, can I take money out of my LLC to pay it without being double taxed? I thought the disregarded entity portion did that for me, but just wanted to make sure.

Steve Vaughan · Answer

The bank will find out when the insurance policy is updated. Wait, what? Most don't update their insurance. In the name of asset protection, their hazard and title insurance no longer apply. LOLWhile we sit an awe of the magician' s left hand reaching inside the hat (DOS risk) the rug is being pulled on the insurance side. All this for a disregarded (worthless, irrelevant) entity. Woohoo!

Costin I. · Answer

@Angelo Pozzuto Most likely you also lost title insurance if you operated the title transfer through a quit claim deed.Nevermind the DOS clause, if the worst comes your way and the bank hits you with a letter, you just have to deed the property back in your name and DOS issue is corrected. But holding mortgage in your name and property in LLC invalidates the asset protection aspect of the LLC (pierces the corporate veil). My 2¢.You might be able to correct some of this, but you need specialized advice - talk with @Scott Smith.

Matt T. · Answer

I'd be careful before you go claiming somethings is illegal. What if things change after closing, i.e. change in job, death in the family and you no longer will use the property as you primary residents. Believe me, when the roles are reversed and you are paying 1% on your primary residence that was once an investment no one will be making a claim of it is illegal, especially the bank as they collect a higher interest rate. It is like the quick claim due on sale clause thing, it is up to the bank to call you out and cancel you loan, not necessarily illegal.

Michael Hooper · Answer

Account Closed Thanks for the advice. FYI, It was a traditional residential investment loan. I was very clear I wasn't going to live in the property. I was mainly trying to say it wasn't a commercial loan. I'm aware I violated the Due on Sale clause. From everyone I've talked to, they very rarely get called in these circumstances, but I decided I was willing to take that risk. Thanks for the help.

Account Closed · Answer

@Matt T. - Please read what I said more carefully and know what you are talking about: You should read the actual loan documents and be advised. Have an attorney explain it to you if you are unsure of the case law surrounding those documents. There are plenty of cases of prosecuted loan fraud based on this very issue. Do a search for "loan fraud, conviction & sentencing" It makes for sobering reading. What I said was:"If you told the lender you were going to live in the property and they wrote the loan based on that information and you didn't live in the property, that is a bad thing and is illegal."If you lie with intent on a 1003 application which is a federal form, you can be charged with loan fraud, bank fraud, & wire fraud. Don't do it.

Account Closed · Answer

Depends on the purpose of the transfer & what you mean by "residential loan". If you told the lender you were going to live in the property and they wrote the loan based on that information and you didn't live in the property, that is a bad thing and is illegal. If you simply mean it is an traditional residential investment loan, no harm no foul. Investment loans are underwritten differently and have a slightly higher interest rate. If it is an investment property, deposit the rents into the LLC & make the mortgage and property tax payments from the LLC. If you live in the property, make the payments as normal. By the way, you most likely violated the Due on Sale clause when you transferred the property to an LLC. That may not be a big deal, but technically the lender probably can call the loan due. That is rare at this time. If interest rates go up significantly in the future, that may change. The lender may be more inclined to call the note. At that point you refinance.

Matt T. · Answer

Recommend reading: https://www.amazon.com/gp/product/1944194142/ref=d...This book answers a lot of what is being asked here.

Scott Smith · Answer

@Michael Hooper this publication of mine here on BP may help you get a better idea of how to handle these lending situations in the future. @Costin I. is absolutely correct about the DOS clause and hit most of the highlights already. I would have personally recommended using a different method to avoid some of the issues you're seeing now. A land trust may still be useful to you for providing anonymity in the future, but you're definitely going to want to speak to an attorney who is familiar with your situation and these legal tools. And if you have additional questions from an educational standpoint, I'm happy to answer them.

Jason D. · Answer

@Michael Hooper I would pay the loan via the LLC, using rental income. It will make it easier for you to keep track of come tax time. I've always been curious about this move... if the title to the property is in the name of the LLC, but the mortgage is in your personal name, how much asset protection is there? I would love to get an attorney's assessment of the "co-mingling" of you personally and the LLC in this type of transaction

Angelo Pozzuto · Answer

@Michael Hooper Just to add onto Michael’s question, should you notify the bank that you are transferring the deed via quit claim into an LLC? Or will they find out anyway?