There are two ways to buy a house when you use other people’s money, i.e. get a loan. You can use either a residential or a commercial lender.
A residential lender is typical for single family homes, duplexes, condos or multiplexes. You can even use a residential lender like me if you are purchasing homes as investment opportunities.
Commercial lenders are used for those buying larger properties – 8 unit, 50 unit or 125+ unit rental properties, a building, a warehouse, etc. Another distinction is that when you’re a residential lender, you use information provided by personal tax returns along with information from the client. Commercial lenders use only business information so that it does not appear on the client’s personal credit report. It is the business that is in control of the loan.
When purchasing an investment property many investors would rather have the protection of buying under their LLC, but since commercial interest rates and terms are not as favorable as residential, most investors will use a residential lender like me.
Now a new guideline has just come out, catching many of us by surprise. Fannie Mae and Freddie Mac are the two servicers that buy and allow protection for mortgage loans on the residential side. They initiate guidelines and those seem to change almost like the wind blows. The new guideline is that they would like to see in title, the individual. So when you buy a property, your name and whoever else was on the loan, is what is recorded on the title work. Many times an investor, to protect themselves since they’re going to be renting the property out, will work with an attorney on what is called a quick-claim deed. They put the title of said home in their LLC name which offers another line of protection should they have problems while in retention of that investment home.
The new guideline that just came down from Fanny and Freddie is that they want to see at least a 6 month chain of title in the actual name that’s doing the refinance. In other words, if we’re refinancing John Smith they want to see John Smith on the title work, not LLC Protection Company. I can only speculate this new guideline was written to address the issues of fraud and deception.
It is catching a lot of investors off guard. If you’re trying to take advantage of some of these lower interest rates, now is the time to send back your quick claim deed to the county, put the home under your own name, wait six months, and then we can begin the refinance process.
There’s another aspect to this. The lender has a line in the Note you sign when you buy that says the Note (loan) can be called due if title work were to change from the name on the loan. What they do is pull records from the courthouse periodically to find out the name that is listed on the title. They are just making sure it’s the same as when they closed the loan. If they find a name that’s different from the one used when the loan was closed, they will send a letter to the address asking for the name to be changed back, or the Note will be called due and would need to be paid back in 30 days.
I asked a friend who is an attorney for his thoughts on this. Here are his comments: “I can see and understand where most conventional mortgage lenders will
simply not allow an LLC or other corporate vehicle to go into title in connection with their loan. So investors have no choice but to take title
“Perhaps the key is that investors need to seek non-conventional financing that doesn’t have these rules. Legally, there is nothing wrong taking title
in an LLC and having the LLC and the individual pledge their credit and be on the note. No way the regular mortgage markets would ever purchase such a
sensible and flexible product, however. Smaller local banks, hard money lenders and private banking might.
“Perhaps clients should get good liability insurance and an umbrella policy and keep title individually. That’s not really an answer though.
“Or perhaps the advice to give is that real estate is not the best vehicle to make a quick buck. It’s not a like a stock or commodity that can be flipped
for a profit quickly, and that is the intent of the FNMA / FHLMC 6 month title regs. People don’t want to hear that but perhaps that is the real
So the long and short is the advice on how to list your property, is going with the actual guidelines from the Note when you first purchased the house is probably the safest way. If you want to protect yourself, you need to consider purchasing the property under your business name using a commercial style lender. Thanks for reading.