It is allowed to transfer title into an LLC on a property with a conforming loan*

*) under some conditions

Someone surely needs to read this. Despite the common myth, transfers of property titles into an LLC, while the property is financed with a conforming loan, is allowed under some conditions.

Don’t take it from me, take it from the FNMA (“Fannie Mae”) servicing guide. This is a document that lays out the rules that the FNMA expects to be applied to the loans they would buy (hence “conforming”, as they “conform” to those rules).

The following conditions need to be fulfilled for such a transfer to be permissible:

• The loan has to have been purchased or securitized by FNMA on or after June 2016; and

• The LLC is ultimately controlled by the original borrower, or the original borrower holds majority interest.

• The transfer must result in a permitted change of occupancy type, such that this change does not violate the security instrument. The example given is - if you took out a loan for primary residence, you must spend at least 12 months actually living there before changing the property to say an investment property.

Now, not all loans are purchased or securitized by FNMA. But even for those loans, FNMA guidelines usually set the industry standards. So, when you have a conforming loan, verify whether it has been purchased/securitized by FNMA.

Some lenders will disagree with the transfers to the LLC, no matter what FNMA says. I happen to think they are just being overly cautious for no reason at all. This may mean if you educate them a bit about the lending standards prescribed by FNMA, they might be more willing to work with you on this. Yes, this will make you look like an obnoxious prick. Some people will just dig in and fight you. Some will say: “oh, ok… I didn’t know that”, and do the right thing. One thing is sure, however: if you do not ask, the answer is always “no”.

Some people decide to go through with the transfer anyways without notifying their lender, seeking forgiveness not permission, until the lender raises an issue. Sometimes that never happens, but things have been known to go sideways. The lender normally can not start a foreclosure process on a property without giving the borrower enough time to cure the issue. In which case, the property gets transferred back into the original owner’s personal name, and the issue is resolved.

But, no matter what you do or don’t do, remember that if you want to refinance the property, you will need to transfer the ownership back into your personal name, so that you could qualify for a new conforming loan.