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In some cases, a business loan may interfere with your ability to obtain a mortgage. The extent to which you have merged your personal and business finances will be of interest to your mortgage lender. This includes the way your company is set up, whether you personally guarantee the loan for the business, and the degree to which your personal and business credit are intertwined.
When applying for a personal mortgage, you are typically at a disadvantage if you are personally liable for a business loan. It may be difficult to obtain approval and the best interest rate as a result.
Links between your business and personal finances
Here are some typical ways that your lender may become aware of your business finances and personal finances entwining:
Business structure
Your application for a personal mortgage may be impacted by the type of business entity you are. For instance, in a sole proprietorship, you and your company are legally one and the same, so you are liable for any debts incurred by the business. Similarly, regardless of a partner’s ownership percentage, if you are a general partner in your business, you may also be held personally liable for the full amount of the company’s debts.
Other business entities, on the other hand, are set up to avoid personal liability for business debts. For instance, the limited partner is typically not liable for business debts in a limited partnership arrangement with at least one general partner and one limited partner. Similar rules apply to the majority of corporations and limited liability companies, which are regarded as separate legal entities.
Personal guarantee
Typically, personally guarantying a business loan establishes a connection to your personal finances. In the event that the business is unable to make payments, you guarantee the loan with a personal guarantee.
A personal loan guarantee can be limited or unlimited. If you accept a restricted guarantee, you are only accountable for a portion of the loan. With an unlimited guarantee, however, you will be liable for the full loan amount.
Business credit history
It is advised that you keep your personal and business credit separate. However, a mortgage lender might want to examine your personal and business credit histories depending on your business entity and how your business loan is structured. Common areas of worry are the quantity of hard credit pulls, late payments, and defaults.
Ways to separate your personal and business finances
Separating your personal and business finances can help you protect your assets and credit. Here are some common options for doing that:
About the author: Lisa Anthony has more than 20 years of experience in banking and finance and works as a small-business writer at NerdWallet. Read more.
FAQ
Can I use SBA loan for down payment on house?
Borrowed funds and SBA 504 Loan Down Payments: Yes, you may borrow funds to use as a down payment for an SBA 504 Loan. To use borrowed money as a down payment, you must, however, adhere to a few fundamental conditions.
Does an SBA loan affect your credit?
Despite the fact that the borrower is required to personally guarantee the loan, it is not recorded on their credit history.
Will a PPP loan affect my mortgage approval?
Fannie Mae and Freddie Mac will treat this new loan as a liability because they view it as a business loan. As a result, they will reduce your debt to income ratio, or borrowing power.
What can stop you from being approved for a home loan?
The three main reasons why loans are typically declined are bad credit, insufficient income, and an excessive debt-to-income ratio. Reviewing your credit report will enable you to ascertain the specific problems in your situation.