Can an LLC Get a Mortgage?

As a real estate investor, you want to protect your personal interests. One way to do so is by doing business through a Limited Liability Company (LLC). Doing so provides a veil of protection for personal assets and shields them from business losses should they occur. If you’re interested in purchasing a property in your LLC’s name, read on to learn more about how this process works.

What is an LLC?

A Limited Liability Company (LLC) is a type of business entity. It can be owned by one or more members and protects your personal assets from seizure if claims are made against the business.

Is It Possible for an LLC to Get a Mortgage?

It’s possible to finance a home purchase with an LLC. In fact, it’s relatively common for companies looking to open brick-and-mortar offices and retail locations or become landlords and generate rental income. But before you move forward, there are benefits and drawbacks to consider when making an informed decision.

How Does an LLC Mortgage Differ from a Traditional Mortgage?

When you take out a mortgage as an individual, it’s a relatively straightforward process. This traditional mortgage is linked directly to you, the borrower. So, it appears on your personal credit report and could tank your credit score if you default on the loan. Furthermore, your personal assets are at risk.

On the other hand, an LLC mortgage involves obtaining a loan through a Limited Liability Company (LLC), a legal entity designed to purchase and manage real estate. This structure primarily influences liability and the separation of assets.

When you finance real estate through your LLC, it means that the lender is extending a loan to your business entity rather than you personally. This shields your personal assets in case of financial difficulties or lawsuits related to the property because the limited liability company bears the responsibility.

An LLC mortgage might not be a different type of loan, but it does describe the process of obtaining financing under the LLC’s name. The loan terms can vary from those offered to individuals, often requiring a higher down payment or a higher interest rate, reflecting the lender’s view of higher risk.

Mortgages under an LLC often involve more paperwork and preparation. Lenders might want to review the LLC’s financials and track record extensively before approving the loan. This process helps establish business credit but doesn’t typically impact your personal credit score directly, unlike a traditional mortgage.

Pros of Using an LLC to Get a Mortgage

Below are the benefits of using an LLC to get a mortgage:

• Member protections: As mentioned above, owners of the LLC will not be held personally liable if the mortgage goes into default unless there’s a personal guarantee.
• Enhanced privacy: The LLC owner’s names will not be disclosed on mortgage documents that are filed with the county in which the property is located. This also means ownership information will not be accessible to the general public. This is particularly beneficial for celebrities or well-known high-net-worth individuals who would prefer to keep their real estate acquisitions through businesses they own out of the public eye.
• Streamlined investing: You have the option to create a multi-member LLC with others to purchase investment properties. Additional members can be added at a later date by buying shares belonging to existing members.
• Separation of assets: If the LLC is used to get a mortgage, it allows the member(s) to separate personal and business assets.

Cons of Using an LLC to Get a Mortgage

There are also drawbacks to keep in mind before applying:

• Challenging process: Many lenders are hesitant about extending mortgages to LLCs due to the elevated risk of default since members aren’t personally liable. They understand that if the LLC falls behind on loan payments, its members cannot be held personally liable for the debt unless they provide a personal guarantee.
• Limited funding options: Traditional mortgage products, like conventional and government-backed home loans (i.e., FHA loans, USDA loans and VA loans), aren’t available to LLCs looking to acquire properties.
• Steeper borrowing costs: The lender may charge a higher interest rate and steeper fees to offset the risk posed by lending to the LLC. Furthermore, you’ll have to pay fees to establish the LLC in your state if you haven’t yet launched your business, along with annual filing fees to keep it active. You’ll also pay more for tax preparation each year when it’s time to file the company’s returns.
• Forfeiture of special capital gains treatment: When it’s time to sell the property, the LLC won’t qualify for preferential treatment if it’s used as your primary residence.

Also, be mindful that providing a personal guarantee when buying a house with an LLC means your personal assets will be at risk of seizure if the loan becomes delinquent. This approach is sometimes required by lenders or encouraged to access more competitive mortgage terms, including lower interest rates, to minimize borrowing costs.

What Do You Typically Need to Get a Mortgage via an LLC?

It varies by lender, but expect to bring a down payment of at least 25 percent to the table. Since these loans are riskier than traditional mortgages, a heftier down payment helps minimize potential losses if the LLC defaults on the loan agreement.

If you don’t have this amount available, you may be eligible for a loan program that lets you use assets or personal and business bank statements to qualify for funding. In addition, some lenders feature loan programs that allow you to use the projected income from the property you’re planning to purchase to qualify for funding.

You should also be prepared to provide the following information and documents to the lender:

• Articles of organization and current status from the Secretary of State
• Operating Agreement (if you have one handy)
• Employer Identification Number (EIN) from the Internal Revenue Service (IRS)
• Company bank statements for the past six to 12 months
• Financial documents (i.e., profit and loss statements) and any documentation related to the company’s rental properties (if applicable)
• Financial data (i.e., earnings, outstanding debt obligations) for each member of the LLC

The Benefits of Using an LLC Loan for an Investment Property

Below is a more in-depth recap of why using an LLC loan to acquire an investment property can benefit you:

• Liability protection: Owning rental property through an LLC can shield your personal assets. In the event of a lawsuit, the LLC’s assets are at risk, not yours.
• Tax advantages: LLCs can elect to be taxed as an S-Corporation, potentially reducing self-employment taxes. Furthermore, you might be able to deduct mortgage interest and operational expenses and lower your overall tax burden.
• Credibility: Operating through an LLC can enhance your credibility with lenders, tenants, and business partners. This is particularly beneficial for rental property management.
• Separation of assets: With an LLC loan, your investment property finances are distinct from your personal ones. This separation simplifies accounting and tax preparation for your business.
• Flexibility: LLCs allow for multiple members, which can be advantageous if you’re looking to pool resources with other investors for property acquisitions.

Ultimately, your role as a business owner comes with its fair share of challenges. However, by utilizing an LLC loan to acquire investment properties, you address many concerns upfront regarding liability and finance management and can shift your focus to growing your real estate portfolio.

Where Can an LLC Get a Mortgage?

Mortgages for LLCs are available through conventional lenders, portfolio lenders, local community banks and private lenders.

Conventional Mortgage Loans for LLCs

These include traditional banks and credit unions. You’ll generally find competitive rates through these lenders, but you’ll have to do quite a bit of legwork to find entities that are willing to lend to you on behalf of your LLC.

Portfolio Lenders

Portfolio lenders manage their own loans instead of selling them off once they close. As a result, they tend to be more flexible than conventional lenders.

Local Community Banks

Like portfolio lenders, local community banks also retain ownership of their loans to LLCs after closing. However, they, too, have flexible eligibility and funding criteria.

Private Lenders

Private lenders, like Angel Oak Mortgage Solutions, are a great place to start when scoping out mortgage options for your LLC. This particular lender is full-service and offers several innovative financing solutions to meet your needs. These include bank statement home loans, jumbo home loans, investor cash flow loans, asset qualifier loans, portfolio select home loans and conventional home loans. Government-backed mortgage products, including Federal Housing Administration (FHA) loans, USDA loans and VA loans, are also available through Angel Oak Mortgage Solutions.

The option LLC owners find most useful is the Investor Cash Flow Mortgage. It’s designed for real estate investors who want to expand their portfolios of income-generating properties without having to provide traditional income documentation, like pay stubs, W2s and tax returns. Plus, proof of employment and complex income statements aren’t required. Instead, the loan amount is determined by the earning potential of the property.

You could be eligible for a mortgage between $75,000 and $1.5 million that can be placed in the LLC name if you already own a home that’s used as your primary residence. Some additional perks to consider:

• This loan can be used to purchase an investment property, complete a rate-term or pull out equity through a cash-out refinance.
• There’s no limit on the number of properties you can acquire in some instances. (Note: Angel Oak Mortgage Solutions may have limitations on the number of homes in your portfolio that can be financed).
• You’re permitted to buy non-warrantable condos and short-term rentals with loan proceeds.
• You may be able to acquire short-term rentals, like VRBOs and Airbnbs, through this loan program.

To learn more about the Investor Cash Flow Loan or other types of mortgages offered by Angel Oak Mortgage Solutions, complete this simple form. A member of the team will respond promptly to discuss your funding needs and options that could be a good fit.

Conclusion: How to Get an LLC Loan for an Investment Property

Securing an LLC loan for your investment property can streamline the management of your real estate assets and protect your personal finances. Start by ensuring that your company is properly structured and complies with all legal requirements. Lenders scrutinize your LLC’s financial health and history, so maintaining accurate records is crucial.

It’s also worth presenting a robust business plan that details your real estate investments’ potential returns. Be prepared to demonstrate sufficient rental income or cash reserves, as lenders typically look for assurance of loan repayment capability.

Remember, while an LLC offers certain protections, personal guarantees may still be required. So, it’s worth understanding the full scope of your liability when entering into any loan agreement.

Frequently Asked Questions (FAQs)