FAQ: Does Transferring Land to

LLC Trigger Due on Sale Clause?

The Short Answer: Probably Not — and Here's Why

One of the most common concerns landowners raise when they want to transfer real property into a limited liability company is this: Will my lender call my loan the moment I do?

It's a legitimate fear. Most mortgages and deeds of trust contain a due-on-sale clause — a provision that gives the lender the right to demand full repayment of the loan if you transfer ownership of the property without the lender's prior approval. Violate that clause, and theoretically the bank can accelerate the entire loan balance and demand you pay it off immediately.

But here's what most real estate owners — and even many attorneys — don't know: federal guidelines issued by Fannie Mae and Freddie Mac expressly permit transfers of mortgaged land to an LLC under certain conditions, and prohibit lenders from enforcing the due-on-sale clause in those situations.

Let me explain exactly how this works.

What Is a Due-on-Sale Clause?

A due-on-sale clause is standard language found in virtually every residential and commercial mortgage. It says something like: if you sell, transfer, or convey the property (or any interest in it) without the lender's prior written consent, the lender may declare the entire remaining loan balance immediately due and payable.

Lenders include this clause to protect themselves. If you sell your property to a third party, the lender wants to be repaid so it can issue a new loan — presumably at a higher interest rate — to the new buyer. Lenders also want to control who owns the property securing their loan.

The practical effect for real estate owners is this: many people are afraid that if they transfer their property to an LLC for asset protection purposes, they'll trigger the due-on-sale clause and their lender will call the loan. That fear often stops people from doing the right thing to protect themselves.

That fear, in many cases, is not justified.

Freddie Mac's Rule: Transfers to an LLC Are Permitted

The Federal Home Loan Mortgage Corporation — commonly known as Freddie Mac — publishes servicing guidelines that lenders who sell loans to Freddie Mac must follow. One of those guidelines directly addresses the situation where a borrower wants to transfer mortgaged property to an LLC.

Section 8406.4(b) of Freddie Mac's Servicing Guidelines (effective October 20, 2021) describes "Additional Permitted Transfers of Ownership" and states that Freddie Mac will permit a transfer of ownership of the mortgaged premises to an LLC or limited partnership — without triggering the due-on-sale clause — when the following conditions are all met:

Condition 1

At least 12 months have passed since the origination date of the loan.

Condition 2

The transfer is to an LLC or limited partnership (LP), and:

• The original borrower is the managing member (for an LLC) or general partner (for an LP) of the entity receiving the property.
• If there were multiple borrowers on the loan, all of them must be members or partners of the LLC/LP, and at least one of them must be a managing member or general partner.
• If the transfer results in a change of occupancy type to an investment property, that change must not violate the security instrument — for example, it must not violate a 12-month primary residence occupancy requirement.

Condition 3

The servicer notifies the original borrower that if the property is ever mortgaged later (refinanced or modified), it must be transferred back to the original owner or natural person first, because Freddie Mac's underwriting requirements apply to natural persons, not LLCs.

If those conditions are satisfied, the lender cannot call the loan when you transfer the mortgaged land to your LLC. The due-on-sale clause simply cannot be enforced in that situation under Freddie Mac's rules.

Fannie Mae's Rule: The Same Protection for Borrowers

The Federal National Mortgage Association — Fannie Mae — has issued a parallel ruling that reaches the same result. Fannie Mae's guidelines, published at Section D1-4.1-02: Allowable Exemptions Due to the Type of Transfer (effective April 13, 2022), require loan servicers to process certain transfers without reviewing or approving the terms of the transfer.

A transfer of mortgaged property to an LLC is on that exempt list — provided the following conditions are met:

• The mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016.
• The LLC is controlled by the original borrower, or the original borrower owns a majority interest in the LLC.
• If the transfer results in a change of occupancy type to an investment property, that change must not violate the security instrument (for example, a requirement that the borrower occupy the property as a primary residence for 12 months).

When those conditions are met, Fannie Mae's rules require the servicer to allow the transfer to proceed without enforcing the due-on-sale clause. The lender has no right to call the loan.

Why Does This Matter to You?

If you own real estate — raw land, a rental property, a farm, a commercial parcel — and you have a mortgage on it, you may have been told (or assumed) that you can't transfer it to your LLC without risking your loan being called. That assumption causes landowners to leave themselves unnecessarily exposed to personal liability.

Owning real estate in your own name means that if someone is injured on the property, or if a lawsuit arises from the property, your personal assets are potentially at risk. An LLC provides a liability shield between you and the property's risks.

The Fannie Mae and Freddie Mac rules described above mean that for millions of American property owners, the transfer to an LLC is a permitted transaction. The due-on-sale clause is not a barrier.

How to Find Out If Your Loan Is a Fannie Mae or Freddie Mac Loan

You can look up whether your mortgage is owned by Fannie Mae or Freddie Mac in about two minutes using the free lookup tools both agencies provide on their websites:

• Fannie Mae Loan Lookup: https://www.knowyouroptions.com/loanlookup
• Freddie Mac Loan Lookup: https://ww3.freddiemac.com/loanlookup/

Enter your address and the last four digits of your Social Security number and you'll know in seconds.

The Bottom Line

If you've been reluctant to transfer mortgaged property to your LLC because you feared your lender would call your loan, you may have been letting an unfounded fear keep you from protecting yourself. Under Fannie Mae and Freddie Mac guidelines, transfers of mortgaged property to an LLC controlled by the original borrower are expressly permitted — and lenders are prohibited from enforcing the due-on-sale clause in those situations.

That said, every situation is different. Loan documents vary, and not every mortgage is governed by Fannie Mae or Freddie Mac guidelines. Before you transfer any mortgaged property to an LLC, you should consult with a qualified attorney who understands both real estate law and LLC law.

Arizona LLC attorneys Richard Keyt and his son, attorney and former CPA Richard C. Keyt, have formed 10,000+ Arizona LLCs. They offer flat-fee pricing, same-day filing, and lifetime free legal support for every LLC they create.

See the fees and contents of our 3 LLC Formation Packages.

To hire us to form an LLC submit our online questionnaire at azllc.com/llcq, or call Richard Keyt at 480-664-7478 or email [email protected].