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.
Getting a mortgage for a rental property owned by an LLC can seem confusing for new real estate investors. But it’s simpler than you might think. In this comprehensive guide we’ll walk through everything you need to know about getting a mortgage loan for an LLC-owned investment property.
What is an LLC and Why Use One for Rental Properties?
An LLC, or limited liability company, is a separate business entity that provides legal and tax benefits for property investors. LLCs shield your personal assets from liability related to the rental property. If a tenant sues they can only go after the LLC’s assets not your house, savings or retirement accounts.
LLCs also provide tax advantages like pass-through taxation. This means rental income and expenses “pass through” the LLC and are reported on your personal returns. So you avoid double taxation.
While not required, most real estate investors own rentals under LLCs for liability protection and tax benefits. As your portfolio grows, using a separate LLC for each property further isolates liability.
Pros and Cons of Getting a Mortgage Under an LLC
Though convenient, getting a mortgage under your LLC has some key pros and cons to weigh:
Pros
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Limited personal liability if the LLC defaults
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Potentially easier financing once established as an LLC landlord
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Interest expenses may be tax deductible
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Can access equity in the property for other investments
Cons
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Lenders often require personal guarantees from LLC members
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Usually need 20-25% down payment
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Higher interest rates than conventional mortgages
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Refinancing limitations compared to personal mortgages
While LLCs limit liability, lenders often require personal guarantees from LLC members. So your personal assets are still at risk if the LLC defaults.
Types of Lenders for LLC Mortgages
You have several options when seeking a mortgage for your LLC-owned rental:
Conventional Lenders
Conventional lenders like banks provide mortgages to LLCs, but with strict requirements:
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20-25% down payment
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700+ credit score
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Debt-to-income ratio below 43%
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Reported on your personal credit report
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Limit of 10 mortgages reporting on your credit
Conventional lending works for a first LLC rental but becomes restrictive as your portfolio grows.
Portfolio Lenders
Portfolio lenders cater specifically to real estate investors. They offer features like:
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Lower down payments, often 10-15%
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No income documentation
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Loans not reported on your personal credit
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Reward larger portfolios with better rates
Drawbacks are higher interest rates and fees than conventional mortgages.
Private Lenders
Private lenders provide more flexible terms for experienced investors. Benefits include:
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Finance up to 90% of purchase price
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Delayed financing for rehab projects
-Lower credit score requirements
- Faster closing timelines
However, private lending is expensive with rates from 8-15% and high origination fees.
Getting Preapproved for an LLC Mortgage
Before applying, take these steps to bolster LLC credibility with lenders:
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File LLC registration documents with your state
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Obtain an Employer Identification Number (EIN) from the IRS
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Set up a business checking account
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Have an operating agreement listing LLC owners
When seeking preapproval, compare offers from multiple lender types. Provide items like:
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Completed loan application
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Two years of tax returns
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Bank statements proving reserves
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List of current rental properties
Qualifying for an LLC Mortgage Loan
Lenders have underwriting requirements to qualify LLCs for financing:
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Down payment: Usually 20-25%
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Credit score: Minimum 620, ideally 720+
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DTI ratio: Below 43% is preferred
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Revenue: Enough rents to cover PITI payments
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Reserves: 6-12 months mortgage payments in reserves
Meeting these criteria demonstrates you can manage the loan responsibly.
Closing Costs and Fees
Closing costs for an LLC mortgage average 2-5% of the loan amount. Fees may include:
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Origination fee to the lender (1-2% of loan)
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Application and processing fees
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Title insurance and title fees
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Appraisal, credit report and legal fees
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Taxes and insurance premiums
Build these costs into your business plan and budget for an LLC rental property mortgage.
Risks of Personal Liability
While LLCs limit liability, lenders often require personal guarantees from LLC members. This means if the LLC defaults, lenders can pursue you personally for repayment.
Before taking an LLC mortgage, understand this risk and your potential personal exposure. Consult an attorney to build the strongest liability protections.
Tips for Securing Financing as an LLC Landlord
Follow these tips when seeking a mortgage for your LLC rental property:
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Shop multiple lender types to compare rates and terms
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Highlight experience managing other investment properties
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Seek lenders that specialize in financing LLCs
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Negotiate for lower interest rates and seller concessions
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Optimize credit score and financial position to improve approval odds
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Consider using an LLC for each property to isolate liability
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Work with a knowledgeable real estate attorney and CPA
Final Thoughts on Getting an LLC Mortgage
With proper planning, getting a mortgage for an LLC rental property is feasible for most real estate investors. Aligning with lenders who cater to LLC landlords makes financing easier.
Just be sure to understand the risks of personal liability despite owning under an LLC. Consulting professionals like lawyers and accountants helps structure the strongest protections.
Owning investment properties under an LLC provides major benefits. But you still need a solid business plan and finances to secure competitive mortgage financing terms from lenders. With the right preparation, an LLC mortgage can provide serious leverage to grow your rental portfolio.
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.
LLC Mortgage Loan Requirements To Purchase Real Estate
FAQ
Does having an LLC affect getting a mortgage?
Is it hard for an LLC to get a loan?
Can I use my LLC to pay my mortgage?
Why do people put their house under an LLC?
How do I find a lender for an LLC mortgage?
The screening and selection process for finding lenders for an LLC mortgage is similar to applying for a personal mortgage. Here’s where to look for a lender: Conventional mortgage lenders such as a bank or credit union typically offer the best interest rates.
What is an LLC mortgage lender?
Private lenders are private investors who create their own mortgage playbook and can often customize a loan based on the individual needs of each borrower. And here’s how to screen an LLC mortgage lender: Ask if the lender is currently working with other real estate investors.
Can an LLC get a mortgage?
You may not be able to get a mortgage: Many mortgage lenders don’t lend to LLCs due to the risks involved. If the LLC defaults on the mortgage, the lender could lose out. On top of that, Fannie Mae and Freddie Mac loans, as well as government-sponsored loans, like FHA loans, aren’t available to LLCs.
Can a business owner get a mortgage under an LLC name?
1. Conventional Mortgage Loans for LLCs Yes, business owners can get a conventional mortgage loan under an LLC name, and often for affordable interest rates. But it comes with some caveats. First of all, conventional lenders don’t love writing mortgages for LLC rental properties, aren’t designed for it, and often make it difficult for you.