How To Transfer An Existing Mortgage To An Llc
Oftentimes its possible to transfer an existing mortgage under your personal name into an LLC that you own and operate.
1. Review assumption clause
Read the assumption clause in the existing mortgage documents to see if you can transfer the mortgage to another party such as your LLC without triggering the repayment or due on sale provisions.
If your current mortgage doesnt allow a transfer, talk with your lender anyway. Explain that you want to transfer the mortgage into a business entity that you own and operate. The lender may be willing to work with you and agree to the assumption of the mortgage by your LLC.
2. Assign the mortgage to your LLC
The lender will have a list of documents and due diligence items to complete before the mortgage can be assigned to your LLC. Sometimes, the lender will create a new mortgage agreement to release you from personal liability by replacing the LLC as the borrower.
3. Quitclaim to your LLC
The title company that handled escrow of your original transaction can prepare a quitclaim deed and record the new mortgage agreement. A quitclaim deed is a basic deed that is used to transfer ownership from one party to another when a warranty of sale isnt required.
Checklist To Complete The Setup Of Your Llc:
How Does The Owners Draw Work
You can make business withdrawals through a cheque from your business bank account. Thus, you can pay for your expenses once the funds are deposited into your account.
This is unlike the case of an employee who is paid a salary via a payroll service that deducts employment taxes automatically.
Now, from an accounting perspective, withdrawing funds from your business reduces your capital account. This is because you are taking out funds from the owners equity.
Owners equity is nothing but the amount of money you have invested in the business. Hence, whenever you withdraw money, you tend to lower the amount of the owners equity.
This can be explained with the help of the following balance sheet equation:
Assets = Liabilities + Owners Equity
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How To Pay Your Mortgage By Phone
Making a mortgage payment over the phone is another option, especially if you forgot to mail in your payment before the due date or have not set up a payment process online.
The phone number to call will be on your monthly bill or found online. The process is typically fairly straightforward be prepared with your mortgage account number and your banking information, such as the routing and account number.
When you pay over phone, the payment is typically credited to your account quickly. Before you make the payment, though, ask the servicer if there is a charge for this convenience.
Using An Llc Or Corporation To Avoid Personal Liability For Business Mortgages
Individuals who create an LLC or corporation generally do it to shield themselves from personal liability. By forming an LLC or corporation, you and your business will be considered separate legal entities. Creditors then aren’t able to go after your personal assets to pay business debtseven if the business can’t pay them.
Example. Let’s say you want to start a property management business that will own and manage a rental property. You want to protect yourself from liability for any business debts, particularly the mortgage loan used to purchase the property. So, you form an LLC and obtain a mortgage in the LLC’s name, pledging the assets of the LLC as security for the debt. If you’re able to obtain a commercial nonrecourse mortgage loan, the rental property will be the only asset at risk in a foreclosure action.
But an LLC member or shareholder of a corporation could be held personally liable for the debt under certain circumstances.
If you are facing foreclosure or struggling to pay your mortgage, learn about your options in Nolo’s The Foreclosure Survival Guide.
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Disadvantages To Using A Heloc To Pay Off Your Mortgage
There are some significant risks to using a HELOC to pay off your mortgage that you should also be aware of.
- Variable interest rates: Home equity lines are variable interest rates, which means the interest rate can change over time. Interest rates are going up, not down, says Nadine Marie Burns, a certified financial planner and CEO of A New Path Financial. That means that even if your initial HELOC interest rate is lower than the fixed rate on your primary mortgage right now, it could easily rise above it in the future. The Federal Reserve is expected to raise interest rates at least six times this year alone.
- Lack of discipline: The fact that a HELOC functions like a credit card is a big draw for many, but it can also be a significant risk. Its an open-ended line of credit like a credit card, so it can be very dangerous for people if they dont have a good money sense, Locke says. In other words: If you need the discipline of a fixed monthly mortgage payment, a HELOC might not be right for you.
- Increasing your debt load: At the end of the day, a HELOC is a second mortgage. Even if your intent is to use it to pay off your primary mortgage, youre still taking out another loan and potentially increasing your debt in the short term, which is a risky move.
Advantages Of Having An Llc
Lets begin by reviewing the most important reasons for using an LLC in your real estate investing business:
The U.S. Small Business Administration notes that using a legal corporate structure like an LLC helps protect your personal assets from business-related debts or lawsuits.
If youre involved in a lawsuit, the other party can only attempt to hold your company liable instead of you personally. So, your personal belongings like a car, residence, and other assets arent at risk.
Easy to set up and register
Limited liability companies are relatively easy to form and register, with some states allowing the entire process to be done online.
While rules vary depending on the state the LLC is in, there are generally four steps to follow:
In order to apply for a mortgage under your LLC, the lender will also require copies of these documents.
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What Are The Advantages Of Buying A House With An Llc
You can tap into a few great advantages when you buy a house with an LLC. These advantages include increased privacy, limited liability, tax benefits and partnership opportunities. Buying a house with an LLC also allows you to keep your business separate from your personal life. Let’s dive into the details of these advantages one by one.
Obtain A Tax Id Number And Open An Llc Bank Account
If your new LLC has more than one owner, has employees, or meets certain other requirements, you must obtain a Federal Tax ID Number . You can do this yourself by filling out a form on the Internal Revenue Service website. Even if its not required, you may need a tax ID to open an LLC bank account.
Once you have a tax ID number, you can go to a bank and open an account in the LLCs name. A separate bank account helps keep your LLC money separate from your personal finances. If you dont maintain this financial separation, you risk losing the liability protection that your LLC provides.
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Who Should Consider Buying A House With An Llc
For first-time real estate investors, buying a house with an LLC offers far more cons than pros. More experienced investors who plan to make a career out of real estate investing could benefit from using this strategy to advance their business. In particular, experienced investors can own a lot of real estate that protects them from personal liability.
How To Pay Yourself In A Partnership
IRS recognizes partnerships similar to sole proprietorships. But, in the case of partnerships, a group of persons rather than a single person have a claim on the revenue or business profits.
This means each partner has a share in business earnings depending upon the percentage of share stated in the partnership agreement.
Since partnerships are similar to sole proprietorships, partners can also receive an owners draw based on each partners share in capital and business profits.
Furthermore, each partner includes his share of income in his personal income tax return. Thus, he is required to pay income tax and self-employment taxes.
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The Bottom Line: Llcs Are Great For Established Investors But Less Useful For New Investors
Members can gain liability protection within their business entity by establishing an LLC. Your state government can give you an overview of your state’s specific LLC laws.
An LLC also offers privacy, limited liability, tax benefits and partnership opportunities. However, you need to watch out for ongoing costs, difficulty getting a mortgage, disadvantages with capital gains treatment and a few other cons.
First-time real estate investors may find it more advantageous to buy property in their own name because of the roadblocks and additional costs of buying a home with an LLC. Established investors should also tread carefully. They should consult a business attorney to determine the best legal structure for their investments.
Remember that it’s normal to feel analysis paralysis! To combat indecision, consider applying for a mortgage in your own name and working your way up to more complex investments.
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Whats An Llc Do I Need One
Many real estate investors buy and own their rental properties under a limited liability company or LLC. The idea is simple: it separates the legal liability between your personal assets and your companys assets .
So, if your tenants pit bull attacks Little Bobby down the street, and Bobbys parents get lawsuit-happy and sue you, the most you could lose is the rental property, not your own house, car, engagement ring, and firstborn child.
As for whether you need one this is the point where we tell you to talk to an attorney. But I will make a few firm statements on the subject:
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How To Pay Your Mortgage Using A Credit Card
Not all issuers, such as Discover, American Express, Mastercard or Visa, permit paying mortgage payments by credit card. With some cards, this is only an option if you go through a third-party payment platform .
In addition, many mortgage lenders are not fans of this option and do not accept credit cards.
Most lenders wont accept credit card payments for the mortgage and the services that do offer the ability to pay via credit card tend to charge a service fee that offsets the value of any rewards youd be earning, McBride says.
Problems and emergencies, such as an illness or job loss, can and do happen, however. Until you get back on your feet, paying your mortgage with a credit card could be your only option.
Check with your card issuer first. While Mastercard allows mortgage lenders to accept debit and credit cards for payments, Visa has only given the green light for mortgage lenders to take Visa debit and prepaid card payments.
Paying with this method might also seem like an easy way to gain some points on a rewards credit card, but, again, the fees involved can be substantial. These will likely erase the value of any points or cash back you earn.
How Do I Transfer Title Of A Property From A Person To An Llc
Transferring your real estate holdings to an LLC may limit your personal liability for claims or lawsuits involving the property.
For owners of rental or investment real estate, its common to form a limited liability company and transfer title to the property from the individual owner to the LLC.
Transferring property to an LLC can limit your personal liability if someone is injured on the property and files a lawsuit against the property owner.
People who own multiple rental properties sometimes form a series of LLCs to insulate each piece of property from liability claims involving other properties.
Here are eight steps on how to transfer property title to an LLC:
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Signing The Loan Documents In Your Own Name
Another way that you might potentially open yourself up to personal liability is by signing the mortgage documents, such as the promissory note, in your own name instead of the name of the LLC or corporation. By signing your own name, rather than on behalf of the LLC or corporation in your capacity as an owner or officer, you could be held personally liable for the debt.
Easy To Setup And Register
Unlike other business entity types LLCs are fairly easy to setup and can pretty much be done online.
The rules for setting up your LLC may vary slightly from state to state, but for the most part, you will be required to complete the following steps:
- Select a Name for your LLC you will need to check with your local Secretary of State to make sure the name is available and not already in use.
- File the Articles of Organization this is what officially registered your LLC and it includes your company name, address, and names and information of each LLC member.
- Create an Operating Agreement the operating agreement describes the role of each member, ownership structure, and how profits will be shared or distributed.
- Obtain Business Licenses and Permits each State will have different licensing and permit requirements so you will want to see what is required for having a rental home in your city/state.
If you plan on applying for a mortgage under your LLC, lenders will want to see the above documents when you submit a mortgage application.
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Get A Loan Modification
You can sometimes arrange a loan modification with your lender. Modifications can include reducing your interest rate, switching from an adjustable-rate mortgage to a fixed-rate mortgage, or adding past-due payments to the end of your loan term.
Lenders typically only allow a loan modification if you run into financial hardship and have trouble making your payments. Loan modifications offer one way to avoid foreclosure, for example.
But if you do run into trouble, a loan modification can help you pay down your loan faster once you get back on your feet financially. For instance, a lower interest rate means a lower monthly payment. If you keep making your previous payment amount on a loan with a lower interest rate, youll knock down your balance faster.
What Is An Llc
A limited liability company refers to a specific business structure. The main reason a business owner chooses to organize their business as an LLC involves avoiding personal liability as a result of the businesss activities.
Members, which can include individuals, corporations, other LLCs and foreign entities, can own an LLC. Most states also permit single owners to own an LLC. Take a look at the laws in the state where your property is located to understand your state’s specific LLC laws.
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How Is Owners Draw Taxed
The Owners Draws are not taxable on the business income. Rather, these are taxable as the income on the owners income tax returns.
Thus, if you are a sole proprietor, your draws are considered personal income and are taxed on your income tax return.
Likewise, the IRS recognizes partnerships similar to sole proprietorships. This means that the earnings generated via partnerships are treated as personal income.
However, in the case of partnerships, a single person does not have a claim on the revenue or profits of the business.
Instead, each partner has a share in the earnings generated based on the percentage of share stated in the partnership agreement.
Therefore, each partner includes his share of income in his income tax return. Furthermore, he is required to pay income tax and self-employment taxes quarterly.
Finally, the rules about the owners draw in the case of an LLC vary depending upon the state laws. Hence, you need to go through the state laws before considering the owners draw and taxes on the same in the case of an LLC.
Also, as a business owner, you pay taxes from the owners draw as in the case of a sole proprietor or partner. This applies to both single and multiple-member LLCs.