For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.
By G. Steven Bray
Investors in residential real estate have long been dogged by the “due on sale” clause in the standard promissory note. It states that the lender may call the note due upon the sale or transfer of ownership of the property. A preferred vehicle for ownership of investment properties is a limited liability company because it provides some legal separation between the property and the investor’s other assets.
Fannie Mae requires that a borrower be personally liable on a note, meaning the borrower must sign the note in his/her name. Fannie won’t allow the name on the property’s title to be different from the name on the note, so investors sometimes quit claim the property title to their LLC after closing. However, this could trigger the due on sale clause if the loan servicer chooses to enforce it.
I have great news! Late last year, Fannie changed its servicing guidelines so that a change of ownership to an LLC in which the borrower owns a majority interest is acceptable and does NOT violate the terms of the note.
A couple important caveats:
– The change applies only to loans purchased by Fannie after 6/1/16; and
– The title must revert to the borrower prior to refinancing.
Fannie still will not allow the LLC to sign the note, and it still requires the property’s title to match the borrower’s name. However, Fannie will allow the time the property was held in the LLC to count towards the 6-month seasoning period for a cash-out refinance.
I did check with Freddie Mac, and it has not followed Fannie’s lead on this issue.