Closing a mortgage in an LLC
Closing a mortgage in an LLC can be a challenge in today's market. A common question from investors is about closing a mortgage in an LLC (Limited Liability Corporation) as they recognize the inherent safety of holding their investment property in an LLC rather than in their own name. If the investment property mortgage is held in an LLC, the assets of the LLC are the only assets a tenant suing could go after protecting an investor's other assets. While this makes all the sense in the wold for the individual investor, unfortunately, residential mortgage lenders have steadfastly refused to allow a mortgage to close in an LLC but will require the loan to close in "the name of a natural person". Why? Because the same shield that the LLC gives your other assets makes it much more difficult to foreclose on a property if you fail to make your payments, However, lets look at some options. Email closing a mortgage in an LLC questions.
To understand your options, we must first understand some basics of the overall mortgage market. The mortgage market is really composed of two components, residential mortgages like you have on your home and commercial mortgages as would finance an office building. The residential market is dominated by Fannie Mae and Freddie Mac both of whom prohibit closing a mortgage in an LLC. The only residential product that will allow closing a mortgage in an LLC would be an Option Arm. Another option frequently used in the residential world is to close in your name and then "quitclaim" the property into the LLC. I understand some investors concern that such a strategy may invoke the "due on sale" clause, bet frankly, I have never seen that happening in 20 years unless the loan was not being repaid.
On the other hand, commercial mortgage products are not bound by the same guidelines and will routinely close in the name of your LLC. I have one commercial lender who actually requires that any loan they close be in an LLC or other legal entity. In years past, commercial loans were not frequently done on residential property because there was a significant difference in amortization periods and interest rates. For example, as recently as three years ago, commercial rates were as much as 2% higher than residential and there was no such thing as amortizing a loan for more than 20 years. Today, commercial rates are within .25-.50 of residential rates, amortization periods to 30 years are common, and several lenders offer reduced documentation options such as stated income commercial loans. I even have one lender who offers 97% financing on residential investment property using a commercial loan. At the time I am writing this (12/27/2007) high loan to value financing for investment property simply does not exist in the residential world.
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