Veterans involved with real estate investing often ask, can you transfer a VA loan to an LLC? In this article, we’ll explain that, while you cannot transfer the actual VA loan to an LLC, investors do have alternative approaches available to limit their personal liability on a VA loan property.
Specifically, we’ll cover the following topics related to VA loans, LLCs, and liability:
- LLC Overview and Benefits
- Transferring a Loan vs. Transferring Title
- Transferring a VA Loan to an LLC
- Transferring Title on a VA Loan Property to an LLC
- Drawbacks to Transferring Title to an LLC
- Alternatives to VA Loan to LLC Transfers
- Final Thoughts
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LLC Overview and Benefits
To begin, we need to provide an overview of limited liability companies, or LLCs.
An LLC is a business structure available in the United States that establishes a legal entity separate from the actual owner or owners. This separate nature means that the individual owners hold no personal liability for the business’s debts or liabilities. For a real estate investor, this structure is appealing because of the liability shield it provides.
For example, assume Sergeant Adams personally owns 123 Main Street. If a tenant slips and falls at the property, he or she could sue Sergeant Adams and potentially receive all of Sergeant Adams’ personal assets as damages if successful in the suit.
Now, assume that Sergeant Adams formed 123 Main Street LLC, and this LLC purchased the property located at 123 Main Street. Now, if that same tenant was successful in a lawsuit (barring gross negligence and a subsequent “piercing of the LLC veil”), he or she would only be able to receive up to the total LLC assets, that is, the property located at 123 Main Street and any associated operating cash, in damages.
For real estate investors with multiple properties and personal assets, this liability protection proves appealing, which is why many investors ask about transferring properties to LLCs. Put simply, an LLC means that if you get sued as a landlord, you’re only on the hook for damages up to that specific property’s value – tenants can’t also go after other properties, your retirement accounts, your primary residence, etc.
NOTE: Having an LLC does not provide real estate investors any additional tax advantages. The IRS does not recognize LLCs. Instead, for federal tax purposes, the IRS either treats them as sole proprietorships or partnerships (or S Corps, if elected).
Transferring a Loan vs. Transferring Title
Having explained LLCs and their advantages, we now need to address an important distinction. When people talk about transferring VA loans into LLCs, they’re often conflating two separate actions.
- Transferring a loan: Transferring a loan means one person assumes the responsibilities for payment outlined in a loan contract from the original borrower. If Captain Jones secured a mortgage from Lender A, Sergeant Smith assuming that loan from Captain Jones would mean that now Sergeant Smith, not Captain Jones, is responsible for paying Lender A (so long as Lender A agrees to a release of liability for Captain Jones). This does not transfer ownership of the underlying property.
- Transferring title: A title is the legal documentation, typically in the form of a deed, stating who actually owns a property. Following the above example, if Captain Jones also transferred the title on the underlying property to Sergeant Smith, Sergeant Smith would now own the property. Transferring title does not change who is liable for paying a mortgage.
Having outlined the distinctions between transferring a loan and transferring title, it’s clear that, when most investors ask about transferring a VA loan to an LLC, they’re really asking about transferring the title of the underlying property to an LLC.
However, for clarity’s sake, we’ll outline the considerations behind both options: 1) having an LLC assume a VA loan from an individual investor; and 2) transferring the title on the underlying property from an individual to an LLC.
Transferring a VA Loan to an LLC
As stated, transferring the VA loan itself constitutes the act of assumption. When one person assumes a mortgage loan from another, that person takes responsibility for making the loan payments. When done properly, a loan assumption releases the original borrower from any liability associated with the loan.
Many mortgage products do not allow assumption, but the VA loan is assumable (though individual VA lender rules differ). Broadly speaking, you can assume a VA loan in one of two ways:
- The person assuming the VA loan is a qualified veteran who substitutes personal VA loan eligibility from the original borrower.
- The person assuming the VA loan qualifies for the loan via VA standards and qualifications (i.e. acceptable income, DTI, assets, credit, etc).
As the above illustrate, only individuals can assume a VA loan. Therefore, individual borrowers cannot transfer a VA loan to an LLC, as the VA does not recognize LLCs as A) eligible VA loan borrowers; or B) ineligible individuals that otherwise meet VA borrowing standards.
Transferring Title on a VA Loan Property to an LLC
Now that we’ve explained that borrowers cannot transfer their actual VA loans to LLCs, we need to explain how, if desired, they can transfer title – or ownership – of the underlying properties to LLCs. However, the original borrower assumes potential risk in doing so, as outlined in this section.
When an individual purchases a house, they typically receive title (ownership) to that property via a general warranty deed. Without diving too far into legalese, a general warranty deed offers the highest level of protection that the deed grantor (seller) transfers his or her full and total ownership in a property to the grantee (buyer).
During a home purchase financed by a VA loan, the general warranty deed will be in the name of the individual borrower (and spouse, if desired) and filed with the local municipality. After the initial purchase, borrowers have the ability to transfer ownership via a quitclaim deed, which carries no warranties (or protections) at all; it simply transfers whatever ownership the grantor has to the grantee.
In the context of a VA loan, the individual borrower could transfer his or her ownership in the property securing the loan to an LLC by filing a quitclaim deed with the local municipality. Put simply, such a deed says that you renounce your ownership in the property and pass it on to another individual, or in this case, an LLC.
However, while you can do this, you should first consider the following risks:
- Continued liability: Even if you’ve transferred title in a property, the fact that you personally guarantee the VA loan associated with the property means that you may remain personally liable during any lawsuits associated with the property, negating the whole purpose of an LLC.
- Due-on-sale clause: When you sign the VA loan closing documents, you’ll likely sign the VA Guaranteed Loan and Assumption Policy Rider, a document outlining specific loan terms. Of note, this rider contains the following clause relating to the transfer of underlying property: “This loan may become immediately due and payable upon transfer of the property securing such loan to any transferee.” While lenders rarely enforce due-on-sale clauses, transferring property securing a VA loan means the lender could make you pay the outstanding loan balance upon such a transfer.
Drawbacks to Transferring Title to an LLC
In addition to the above risks associated with transferring title of a VA loan property to an LLC, significant financing-related drawbacks exist to such an action, as well.
If you’re a new real estate investor, you’ve likely asked around with different lenders about taking out a mortgage for a rental property as an LLC, not an individual. And, you’ve likely been told that most lenders won’t consider this; they want the security of lending to an individual with documented assets and income, not an LLC. And, while some lenders (due to investor demand) will provide a residential mortgage to an LLC, such a loan will typically require higher down payments and interest rates and more robust income documentation.
So, what does this have to do with transferring a VA loan-purchased property to an LLC? As real estate investors, one of the primary benefits to building equity in a rental property is the ability to conduct a cash-out refinance down the line, using that cash to purchase more properties.
However, if you’ve transferred the title of a property to an LLC, most lenders won’t consider providing you a cash-out refinance. As such, you significantly hamstring your future financing options.
Alternatives to VA Loan to LLC Transfers
When real estate investors ask about transferring VA loans to LLCs, what they’re really asking is, how can I receive the liability protection afforded by an LLC?
The answer? Umbrella insurance.
Umbrella insurance helps protect your personal assets while still allowing you to keep properties in your name, thus retaining the ability to tap into further financing.
When you own a home secured by a mortgage, you’re required to have a homeowner’s insurance policy (though you should always have homeowner’s insurance, loan or not). In addition to providing property casualty protection (e.g. fire, wind, hail damage, etc.), these policies also provide personal liability protection, that is, protection in case someone sues you.
Umbrella insurance basically tops off the liability protection included in a homeowner’s policy. For example, if your homeowner’s policy includes $300,000 of liability protection, it means that if you’re sued for up to that amount, insurance will cover it. Umbrella insurance would cover amounts above this base protection. As such, a $1,000,000 umbrella policy in this example would mean that, if sued, you’d have additional protection from $300,001 all the way up to $1,000,000.
For investors concerned about personal liability protection, an umbrella policy offers a cost-effective option while avoiding the potential risks and drawbacks of transferring property title to an LLC. For example, if you have approximately $2,000,000 worth of total assets (primary residence, retirement accounts, rental properties, etc), taking out a $2,000,000 umbrella policy means that if a tenant sues you, insurance, not your personal assets, will cover successful lawsuit damages.
Final Thoughts
While investors can, technically, transfer title (ownership) in a VA loan property to an LLC, the above outlines both the risks and drawbacks of such an approach.
Real estate investors concerned about personal liability protection would be better served by taking out an umbrella insurance policy and updating it annually to make sure its coverage amounts align with total assets.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
