Can You Transfer Your Property to an LLC If You Have a Mortgage on the Property?

You can deed a mortgaged rental to an LLC, but if your mortgage has a due-on-sale clause, the transfer gives the lender the right to demand the full balance, and you stay personally liable on the loan either way. The federal law that limits due-on-sale enforcement protects some family and trust transfers of a home, not a transfer to an LLC. Before you record the deed, get the lender's written consent, refinance in the LLC's name, or keep title in your own name.

What the due-on-sale clause lets your lender do

A due-on-sale clause says the lender may require immediate payment of the whole loan if you sell or transfer the property, or an interest in it, without the lender's consent. Look for it in the section of your mortgage or deed of trust titled "Transfer of the Property" or similar. Federal law, the Garn-St Germain Act, lets lenders enforce these clauses even where state law would otherwise forbid it.

Two points follow from that:

• Deeding the property does not move the loan. The promissory note is your personal promise to repay. After the deed, the LLC owns the property, but you still owe the debt, and the lender can still foreclose on the property if payments stop.
• Enforcement is the lender's choice. The clause gives the lender an option, not a duty. A lender that learns of the transfer can call the loan due, accept the transfer, or do nothing, and it can decide later. Recording a deed without consent leaves that option open for as long as the loan is outstanding.

If the lender calls the loan, you have to pay it off, usually by refinancing, or face foreclosure.

Why the federal exemptions do not cover an LLC

The Garn-St Germain Act lists transfers that a lender may not use to trigger the clause, but only for loans on residential property with fewer than five units. The list includes:

• A transfer that makes your spouse or children owners of the property.
• A transfer to a relative after the borrower's death.
• A transfer into a living trust in which you remain a beneficiary.
• A lease of three years or less with no option to buy.

A transfer to an LLC is not on the list, even an LLC you own entirely. The federal regulation that carries out the act, which applies to all lenders, goes further: it applies these protections only to a loan on a home the borrower occupies or will occupy. A rental you do not live in gets no protection from the list, including for a transfer into a living trust.

Fannie Mae's exception for LLC transfers

If Fannie Mae owns your loan, its rules let the servicer allow a transfer to an LLC without calling the loan when all of these are true:

1. Fannie Mae bought the loan or packaged it with other mortgages into investments backed by loan payments on or after June 1, 2016.
2. You, the original borrower, control the LLC or own a majority interest in it.
3. If the property was your home, turning it into a rental does not break the mortgage's occupancy promise, such as a promise to live there for 12 months after closing.

The servicer must also tell you that the property has to be deeded back to an individual before you can refinance it with a loan sold to Fannie Mae, because Fannie Mae buys loans made to natural persons, not LLCs.

To find out who owns your loan, use the loan lookup tools on Fannie Mae's and Freddie Mac's websites, or ask your servicer. If Freddie Mac or another investor owns it, ask the servicer in writing what its policy is for a transfer to an LLC you control.

Your options

A personal guarantee means a claim by that lender can reach your personal assets, even though the LLC holds title. For whether the LLC is worth this effort at all, see whether to form a separate legal entity for your rentals.

Title and property insurance after the deed

Title insurance. Your owner's policy insures the person named on it. The standard American Land Title Association (ALTA) owner's policy forms continue coverage for a new owner wholly owned by the named insured, such as a single-member LLC you own. The 2006 form applies this only when the deed is given without payment, while the 2021 form drops that condition. If the LLC has a member other than you, or your policy predates these forms, ask the title company for an endorsement or a new owner's policy before recording.

Property insurance. Ask the insurer to confirm coverage for you and the LLC before the deed records. Some insurers cover LLC-owned residences under homeowners policies with appropriate endorsements, but coverage depends on the insurer, policy terms, and property use. For a rental, ask whether you need a landlord (dwelling fire) policy in the LLC's name, with you as an additional insured. Send the new declarations page to your servicer so the lender stays listed as mortgagee, the policy's term for the mortgage lender. For coverage types, see whether you need landlord insurance.

Steps before you record the deed

1. Find the due-on-sale clause and the loan owner.
2. Get the servicer's consent or written confirmation, or line up a refinance.
3. Have your insurer confirm coverage for the LLC and the property's rental use.
4. Ask your title company about an endorsement or a new owner's policy.
5. Check state and local transfer tax and property tax rules for the deed; see the tax consequences of transferring property to an LLC.
6. Record the deed and update leases so tenants rent from the LLC.