Transferring Your Home Into Your Business?
Want to change the ownership status of your home?
It’s common for property owners to quitclaim real estate into, say, an LLC that they’ve registered. If you do this, have you consulted with your mortgage company in advance? Here’s why we ask.
Pause for the Clause
Lenders include a due on sale clause in their home loans. To be exact, the promissory note for the loan includes an alienation clause. It signifies that a lender may ask for a full payoff if the owner transfers the house title.
To a lender, the home is collateral. Lenders are concerned when borrowers convey their collateral to other parties without the lender’s go-ahead. Even homeowners who are not selling, but merely conveying the home into their business names, are implicating the loan’s alienation clause.
Let’s take a look at how this plays out.
Quitclaiming the House?
Say you quitclaim your house or condo, which still has a mortgage on it, from your name to the name of your business. You’ll record the quitclaim with the county recorder of deeds. This is a public change in the title, which means that lender has notification.
Now, you’ll want the insurance to cover the home under your business name. When you notify your insurance carrier of a change in the beneficiary’s name, then the lender, who is also a named beneficiary, receives a notice of the change.
Whenever the lender receives a notification, it has the prerogative to stand by, or act. In short: Once the homeowner changes the name on the title, the mortgage lender can call the loan due.
Yes, this is a risk — even if most lenders don’t observe such changes when it comes to primary residences, and even if you have the perfect payment record.
What Could Happen?
The lender could reject your payments from that point on. Or it could instruct you to deed the house back into your individual name. When the lender balks at accepting payments, a homeowner might simply use a quitclaim deed and transfer the title back to the individual name to continue coverage.
Again, action on the due on sale clause might never happen. A lender could decide not to enforce the clause, as long as the real estate hasn’t been sold.
To know just what will happen in your case, call the mortgage lender to obtain prior permission to convey the title to your business.
Why Lenders Care About the Clause
A home is collateral for the loan it secures. The mortgage borrower voluntarily allows the lender to place a lien on the title. When the title changes, the lienholder’s asset changes. The borrower could be deemed as defaulting on the loan for having breached the contractual obligations in the promissory note.
When a lender notices that the home is transferred into a business name, it might deem the conveyance a bankruptcy risk. This means that the default risk to which it originally agreed is in question. Remember, the underwriter vetted the individual, not the business. Loans that don’t meet underwriting standards compromise the value of the loan on the market.
The key point is this. Signing a mortgage agreement means promising to abide by its language. So, check the loan documents and read about the consequences for default. They can pertain to any type of conveyance that happens without the lender’s advance permission. You might see terminology to the effect of: without the lender’s written consent.
Are Lenders Getting Stricter?
If the homeowner is paying back the loan faithfully, and the house is clearly not being sold, wouldn’t a lender that calls the loan due be overreacting?
These days we cannot be surprised if lenders are micromanaging their risks. They are also keen to take advantage of the opportunity to lend money for increasingly higher returns.
So, keep abreast of the macro environment. When interest rates are going up, lenders have the opportunity to relend funds for higher returns. As a practical matter, if a bank can call a relatively low-rate mortgage due and lend the money at a higher interest rate, the bank has a business reason to scrutinize its loans for borrower breaches.
Are There Workarounds?
What about putting the real estate into a revocable living trust? This should not trigger an alienation clause if the home is your primary residence. Speak with your local wills and trusts lawyer to understand your own situation.
The Garn-St. Germain Depository Institutions Act allows borrowers to transfer the property into a living trust unless it is a commercial property defined as including more than four units. (The 1982 Act also stops new title holders from assuming the previous title holder’s lower mortgage rates.)
Here again, if the beneficiaries have changed, the title change could accelerate the loan’s due date. Best practice? Call the mortgage company and get them on board.
☛ Learn more about how to plan and who to call before conveying your home into a living trust. To know how your personal estate planning factors will impact your taxes, consult your accountant.
Some homeowners sit down with their lawyers and create land trusts with a business as the named beneficiary. This legal decision can keep the changes they make from triggering insurance clauses and other issues.
And some investor owners steer clear of conventional mortgages and opt for somewhat pricier portfolio loans that permit the deeding of real estate into LLCs.
Are There Exceptions?
There are a number of exceptions, but let’s just note the most common one. Some mortgages are assumable loans. The FHA backs assumable mortgages.
Assumable means able to be transferred, under the same terms, to another title holder. Therefore, the outstanding mortgage balance does not come due upon a transfer. As a rule and a matter of logic, if a mortgage is assumable, it does not contain a due on sale clause.
☛ Note: Conveying a home “subject to” a mortgage is not the same as assuming the loan. Learn more here.
Other special circumstances that permit a transfer of title without triggering a due on sale clause? The prominent ones involve the owner’s death or divorce, when the beneficiary of the interest lives in the home, or when a joint tenant takes over the loan payments.
☛ Learn more details about what happens when the mortgage on your home outlives you.
Final Words to the Wise
Using a deed? A conversation with your mortgage company in advance is the best policy. Then, follow the rules set forth in the documents. You might need written permission to make your transfer safely.
Lenders have rights. Mortgage agreements facilitate their ability to enforce those rights. Indeed, a lender can opt to act on an alienation clause at any point after a deed change — not just immediately.
In a strong market with steadily rising interest rates (which is exactly the case now), banks and credit unions have incentives to call mortgages due on technicalities. And they can. Awareness of these important points can spare a homeowner from inconveniences and a good deal of wasted time.
Garn-St. Germain Depository Institutions Act (Pub. L. 97–320, H.R. 6267, enacted on Oct. 15, 1982): Preemption of Due on Sale Prohibitions.
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