When 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. These are two separate actions that can’t be conflated.
While it’s impossible to transfer your VA loan to an LLC, alternative solutions – like transferring your property’s title – can help you limit your personal liability on a VA loan property.
- 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
LLC Overview and Benefits
A limited liability company – or LLC – is a structure that allows United States-based business owners to establish a separate legal entity for business dealings.
This separation protects individual owners from personal liability for business debts or liabilities.
Here’s an example to show how it works:
Assume Army Sgt. Guy Manderson personally owns a rental condo at 123 Main Street. A tenant who slipped and fell on the property could sue Manderson for damages. If successful, Manderson would have to use his personal assets to cover the cost.
However, if Manderson formed 123 Main St. LLC to purchase the property, the tenant could only sue for the total of the LLC’s assets: the property and any associated operating cash.
Landlords and real estate investors with multiple properties and personal assets rely on LLC liability protections to isolate their properties’ liabilities from each other.
Put simply, a landlord who loses a suit to a tenant is only on the hook for damages up to the specific property’s value. Tenants can’t go after other properties or your personal assets, such as a retirement account or primary residence.
However, an LLC does not provide real estate investors with any additional tax advantages because the IRS does not recognize LLCs.
For federal tax purposes, the IRS may treat an LLC as a sole proprietorship, partnership or an S corporation. S corporations are businesses that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes.
Transferring a Loan vs. Transferring a Title
LLCs have their advantages for real estate investors. If you’re looking into an LLC for your property, remember to distinguish between transferring your VA loan to your LLC and transferring your home’s title to your LLC.
Here’s how it’s different:
- Transferring a Loan to an LLC: When you transfer a loan to an LLC, the LLC assumes responsibility for paying the loan from the original borrower. If a property owner secured a mortgage from one lender, then transferred it to another person or LLC, that person or LLC is now on the hook for the mortgage payments. However, that doesn’t mean they own the property.
- Transferring a Title to an LLC: A property title is legal documentation, such as a deed, that states who owns the property. Transferring a property’s title to an LLC means the LLC now owns the property. But, it does not change who pays the mortgage.
Let’s dig a little more into these options.
Transferring a VA Loan to an LLC
Transferring a VA loan-purchased property to an LLC constitutes an act called assumption.
In the lending world, assumption usually occurs when a buyer or heir takes over the original owner’s mortgage.
Whoever assumes a loan becomes responsible for making loan payments. Loan assumption releases the original borrower from further mortgage liability.
Many mortgage products do not allow assumptions. However, the VA loan is an assumable loan under certain conditions:
- The person assuming the VA loan is a veteran who is eligible for a VA loan. The assuming veteran must substitute their personal VA loan entitlement for the original borrower’s.
- The person assuming the VA loan must qualify for the loan under the VA’s standards, including minimum acceptable income, debt-to-income ratio (DTI), personal assets and credit standards.
As you can see, these rules only allow people to assume a loan. Borrowers can’t transfer a VA loan to an LLC, because the VA does not recognize LLCs as eligible VA borrowers.
Keep in mind, individual VA lender rules differ and may be stricter than VA requirements. Check with your loan officer to see what’s allowed.
Transferring Title on a VA Loan Property to an LLC
Now, if you’re looking to transfer your property’s title (or ownership) to an LLC, you’re in luck.
When you purchased your property, you probably received a title to the property in the form of a general warranty deed and filed it with your local government.
A general warranty deed is a legal record that the seller (deed grantor) has transferred property to a buyer (grantee).
For VA loan home purchases, general warranty deeds are in the borrower’s name. (Borrowers may also include a spouse, if desired).
After the purchase, borrowers can transfer ownership using a quitclaim deed, which transfers the grantor’s ownership to a grantee. However, it does not carry any warranties or protections.
You can file a quitclaim deed with your local municipality to transfer your property ownership to an LLC.
However, doing so renounces your personal ownership of the property securing your VA loan, which you’re still personally responsible for. This exposes you to some potential risks:
- Continued liability: Because you personally guarantee the VA loan associated with your property, you may remain personally liable during any lawsuits associated. Until you pay off your mortgage, this continued liability could negate the whole purpose of your LLC.
- Due-on-sale clause: When you closed your VA loan, you may have signed a VA Guaranteed Loan and Assumption Policy Rider. This document outlines specific loan terms, including a clause about transferring the underlying property:“This loan may become immediately due and payable upon transfer of the property securing such a loan to any transferee.”
Lenders may choose how and whether to enforce these clauses, which require borrowers to pay off their loans immediately upon transferring a property.
Talk to your loan officer before transferring your title to an LLC to see how your lender approaches these situations.
Drawbacks to Transferring Title to an LLC
Transferring your VA loan property to an LLC has a few other drawbacks.
New real estate investors may ask several lenders about using an LLC to take out a mortgage for a rental property.
Many won’t allow this; lending to an individual with documented assets and income provides more security than lending to an LLC.
Lenders who provide residential mortgages for LLCs may require robust documentation and higher down payments and interest rates.
However, lenders may not approve a cash-out refinance if you’ve transferred the title of a property to an LLC.
VA Loan to LLC Transfer Alternative
If you’re looking for liability protection but can’t transfer your property to an LLC, consider an umbrella insurance policy.
Umbrella insurance protects your personal assets while allowing you to keep your properties in your own name, so you can tap into further financing.
When you own a home secured by a mortgage, you’re required to have a homeowners insurance policy. In addition to providing property casualty protection for things like fire, wind or hail damage, these policies also provide personal liability protection in the event of a lawsuit.
Umbrella insurance tops off the liability protection included in your homeowner’s policy.
For example, if your homeowner’s policy includes $300,000 of liability protection, your insurance will cover up to $300,000 in damages. However, if the worth of your total assets – primary residence, savings, retirement accounts and rental properties – total $2 million, you could be on the hook for up to $1.7 million.
Umbrella insurance can cover the difference between your policy’s base protection and your total assets.
A $2 million umbrella policy in this example would mean that, if sued, you’ll have additional protection from $300,001 up to $2 million.
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.