Can an LLC Get a Mortgage? Pros and Cons of Using an LLC for a Mortgage

If you are planning to buy a mortgage using an LLC then you will be happy to know that you can get a mortgage with an LLC. However, you should keep in mind that you won’t apply for all types of home loans with an LLC. For example, if you apply for a mortgage with an LLC then you can’t get FHA loans or a conventional loan that is sold to Fannie Mae and Freddie Mac.

Definition of LLC

LLC stands for Limited Liability Company and it is a type of US-specific form that refers to various private limited companies. This type of business structure can have one or more owners who are in most cases referred to as members. In an LLC company, all the members participate equally in the management of the business.

Many businesses prefer this business structure because with an LLC they can avoid personal liability thanks to the business’s activities. So, it means if the business itself can’t pay the creditor like a supplier, a lender, or a landlord then the creditors can’t legally come after any LLC member’s house, car, or other personal possessions. Any individuals, corporations, or other LLCs can own an LLC!

Is it Possible to Get a Mortgage with an LLC?

Yes, it is possible to get a mortgage with an LLC but there are some restrictions. You will be able to get a mortgage in your LLC’s name but to do so, you have to make sure it is the best decision for your business. This is because the interest rate for an LLC mortgage is much higher than the common type of mortgage.

Another thing you should keep in mind is that if your LLC doesn’t have a strong credit score then you have to give a personal guarantee as additional credibility and security for the lender to grant your loan. Below is a list of documents that you have to submit while applying for a mortgage with an LLC –

• Articles of Organization and an Operating Agreement for your LLC
• Details information of all the members and or shareholders
• Report from Corporation Commission or Secretary of State’s office that shows your LLC is ok
• Documents that showed all the annual fees are paid
• Documents regarding Employee identification number (EIN)
• Bank account information that shows deposits and withdrawals, current and average balance
• Personal income, debt, and credit information of every LLC member
• Rental property history like tenant lease, profit and loss statements, etc.

Mortgage Options for an LLC

There are quite a few options available when you are considering a mortgage for an LLC. All these mortgage options have benefits and disadvantages, therefore you should understand each option before applying.

1. Conventional Mortgage Option for LLC

In most cases, business owners can get a conventional mortgage with their LLC. Usually, they get an affordable interest rate but with some restrictions or conditions. You should keep in mind that conventional lenders don’t like to lend money to LLC rental properties. Moreover, in many cases, they report the mortgage on your credit report despite the loan being on a mortgage. So, having too many loans on your credit report can destroy your credit score. Therefore, make everything clear with the lender before applying for a mortgage with an LLC.

2. Portfolio Lenders

You can also apply for portfolio loans under your LLC name. This is an excellent option because this type of loan is usually kept in-house, within their own portfolio. This is not like selling the loan off on the open market just like the conventional lenders. This type of loan option has some advantages for an LLC owner. The first thing is, unlike the conventional mortgage, portfolio lenders don’t report the loan to the credit report. Moreover, if you have more properties, the portfolio lender will offer you more affordable loan terms. The only downside of a portfolio loan is you have to make a large down payment of at least 20% or above.

3. Local Community Banks

Many local community banks offer mortgages for an LLC. This is an excellent option for LLC owners because loan programs for rental properties from local community banks are kept in-house in their own portfolios. The mortgage offered by local community banks is more affordable compared to nationwide or regional landlord lenders. Moreover, this type of bank also offers renovation-perm loans or construction-perm loans. All the loans come with a permanent 30-year mortgage once you completed construction or renovation. One key problem with this type of lender is, that they can either charge you less or charge you more than larger lenders. Therefore, you should find out all the costs, charges, and fees before closing a deal with a local community bank.

Advantages of Using an LLC for a Mortgage

There are quite a few advantages available to using an LLC for a mortgage. If you are planning for real estate investment then an LLC is perfect because LLCs are not complex to set up. Moreover, they provide various benefits. Below are some key advantages of using an LLC for a mortgage.

Build the Business Credit

An LLC will help you build credit for your business. So, you can easily separate your personal credit from business credit. In order to open an LLC, you will need a business credit card or bank account. Moreover, you will also need an EIN to establish a business entity.

Protect your Asset

This is a very important feature of an LLC. When you set up an LLC, it will protect your personal finance as well as your business from various problems and also from the event of a lawsuit. Moreover, if you have more than one property then you can set up separate LLCs for each property to ensure that they are protected from one another. So, if anything happens to any of your rental properties then no one can put a lien on your other properties.

Tax Advantages

An LLC also provides tax advantages for the owners. Having an LLC means you can pass through taxation by reporting the profit and losses on your personal tax return. Moreover, you don’t have to report a corporate tax return so you won’t be taxed twice. Moreover, you will also be able to deduct certain expenses related to your property from your personal tax return!

Disadvantages of Using an LLC for a Mortgage

You should keep in mind that using an LLC for a mortgage has some disadvantages too. There will be initial costs, difficulty getting a mortgage, lack of preferential capital gains, and many other problems. Therefore, you should also consider the disadvantages before applying for a mortgage with an LLC.   

Increased Cost

Setting up an LLC will cost you some extra money. While filling your LLC’s articles of organization, it might cost you from $40 – $500, depending on the state where you live. Moreover, you also have to pay for business licensing and permit fees. Other cost includes special minimum annual LLC taxes, annual report fees, registered agent fees, business license renewal fees, etc.

Hard to Get a Mortgage

It is very difficult to get a mortgage with an LLC. This is because residential lenders don’t like to give a mortgage to LLCs because of the limited liability. Moreover, financial institutes know that the owners or the members of the LLC can’t become personally liable for the LLC or corporation’s debts. Therefore, many lenders won’t offer a mortgage loan to an LLC.

Won’t Qualify for Most Residential Loans

Another disadvantage of an LLC is, that you won’t qualify for most of the residential loans. For instance, you won’t qualify for an FHA loan with an LLC. Moreover, you won’t get a conventional loan sold to Fannie Mae and Freddie Mac with an LLC. So, if you are planning to buy a duplex or multiplex unit then you should choose the FHA’s low down payment options instead of setting up an LLC.

FAQs about Can an LLC Get a Mortgage

Will a bank give a mortgage to an LLC?

Yes, a bank will give a mortgage to an LLC. Usually, an LLC provides extra layers of legal protection for your personal and business assets. So, there are many banks and financial institutes that offer a mortgage to an LLC. In most cases, a mortgage for an LLC has a higher interest rate than common mortgages.

Does an LLC have its own credit score?

Yes, every LLC has its own credit score. You should keep in mind that the credit score of an LLC can affect your personal credit score. So, carefully handle the credit of an LLC or it can create a problem for your personal finance!

Can my LLC pay my personal mortgage?

It is possible to withdraw from your business account to maintain the cash flow but you should not use that money to pay your mortgage or anything else. According to many financial experts, it is not wiser to use the funds of a business checking account for your personal use.

Can I live in a house owned by my LLC?

Yes, you can live in a house that is owned by your LLC. You can rent the house to yourself with some rules and stipulations.

Can I buy a car with my LLC?

If you are living in the USA, then you can buy a car under your LLC. However, you have to make sure that your business is properly registered as an LLC. Moreover, you will need an Employer Identification Number for the LLC.              

References:

https://www.rocketmortgage.com/learn/buying-a-house-with-an-llc
https://www.upcounsel.com/can-an-llc-get-a-mortgage

Last Updated on August 7, 2022 by Ana S. Sutterfield