Rules to refinance properties have just been changed and that means that hundreds of thousands of real estate investments are now in the wrong business structure. Freddie Mac, one of the two largest underwriters of conforming loans on the secondary market, has just changed their internal rules to state that they will no longer refinance a property that has been inside of a Limited Liability Company (LLC) for any time within the past 6 months.
Fannie Mae, the other big underwriter, is expected to follow suit with a similar change.
Conforming loans are typically used for single family homes and four unit properties (also known as four-plexes or four family homes) that fall within certain loan limitations. It’s the backing of Freddie and Fannie that keep the loan rates for these type of loans so much lower than the rates for stated income, jumbo loans and any other loan that doesn’t fit within their criteria. In other words, if you’ve got a great deal on your loan, chances are it was underwritten by Freddie or Fannie.
With this change (and proposed change in the case of Fannie), that means if you have a conforming loan, you have 3 choices:
(1) Never refinance. This is not my favorite strategy because you end up losing the velocity of your money.
(2) Go bare. Don’t put it in a business structure to protect the asset. This is definitely NOT recommended. You put all of your personal assets at risk with this plan.
(3) Use a Trust Sandwich™. The Trust Sandwich puts a Living Trust in place to hold the asset, the LLC owns the beneficial interest and there is then a second Living Trust to provide estate planning as well. It’s the best of all worlds.