Closing a residential loan in the name of an LLC isn’t easy. Simply put, lenders want to lend to people, not to legally-protected companies. But potential homeowners set on this idea do have some options, with certain ones possessing more risk than others.
What is an LLC?
LLC stands for limited liability company; it’s a business structured to combine the limited liability of a corporation with the taxation of a sole proprietorship. When a business is an LLC, it becomes its own legal entity.
In some states, LLCs must be formed before people can offer certain services (such as medical services). Yet, even when not required, forming an LLC is often necessary in order to protect the personal assets of the company’s owner. LLCs are responsible for their own debts and legal matters; individual possessions (such as the owner’s life savings) are untouchable.
LLCs aren’t the only way business owners can protect themselves; a blanket liability insurance policy offers protection, too. This is a single policy that covers more than one property type (either at the same location or multiple locations).
LLCs and Lending
Turning a company into an LLC makes sense in the eyes of any businessman or woman. It’s smart: LLCs equate to protection. But mortgage lenders have grown hesitant to close loans in the name of an LLC because this protection extends to foreclosure and makes it more difficult for a bank to reclaim property in default.
The Options of Closing
Fannie Mae and Freddie Mac, the two entities that dominate the residential market, don’t allow loans to close in the name of LLCs because LLCs don’t qualify on their own. This makes it hard to procure lending, but not impossible.
Some borrowers opt to borrow in their own names and then, after closing, put the title under the name of the LLC. Technically, this voids the deed of trust; you’re allowed to add someone to the title but you’re not allowed to remove the original qualifier. If the deed of trust is voided, lenders can require the borrower to pay off the entire mortgage. Anyone considering this should consult a lawyer first.
Closing a commercial loan on a residential property can also be done. In the past, the higher interest rate on commercial loans – up to 2% higher – prohibited this. Today’s commercial rates are much more comparable to residential ones.
Closing a residential loan in the name of an LLC is tricky, but there are a few options for those set on doing it. As mentioned above, anyone hoping to get creative with the process should consider the legal ramifications before signing on the dotted line.
By Michaela Phillips, Guaranteed Rate, Inc. Michaela Phillips is the Vice President of Mortgage Lending at Guaranteed Rate, Inc. Contact Michaela at 303.579.5517, e-mail [email protected] or visit michaelaphillips.com. NMLS:312874.