Question: I own a rental home that I want to put into an LLC for asset protection, but it is subject to a deed of trust that has a due on sale clause in it. If I form an LLC and convey the home to the LLC will the lender exercise the due on sale clause and demand I pay off the loan?
Answer: A due on sale clause is text in the deed of trust that says that the lender can demand payment of the balance owed on the loan if the borrower transfers ownership of the land. This is a common clause in residential loan documents.
I’ve formed 4,000+ AZ LLCs into which people transferred land that was subject to a mortgage or deed of trust. I’ve never had an LLC client’s lender call the loan because of the transfer. If your lender were to call your loan Arizona law says that if you cure the default by transferring the land back to you the lender must stop the foreclosure.
The purpose of a due on sale clause is to give the lender an option to call the loan when the borrower ceases to own or have any involvement with the land. When the borrower transfers the land to the borrower’s LLC the borrower continues to be involved with the land and will make the future payments. That’s why lenders don’t call the loan when the borrower transfers the land to the borrower’s LLC.
Advice: Don’t contact the lender and ask for permission. The standard response is you cannot do it and you may get yourself on the lender’s radar.
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