Can an LLC Get a Home Equity Loan? Everything You Need to Know

Getting a home equity loan for your LLC can be a great way to access capital for real estate investments or other business purposes. However, there are some important factors to consider when using LLC property as collateral for a loan. In this comprehensive guide, we’ll cover everything you need to know about getting a home equity loan for your LLC.

What is a Home Equity Loan?

A home equity loan is a type of second mortgage that allows homeowners to borrow against the equity they have built up in their home Equity is the difference between what your home is worth and what you owe on your existing mortgage

For example, if your home is worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 in equity. With a home equity loan, you can tap into that equity and receive a lump sum of cash The loan is secured by your home, meaning if you default the lender can foreclose.

Home equity loans typically have fixed interest rates and a set repayment term of 5-30 years. The benefits include accessing a large lump sum for major expenses, fixed monthly payments, and potentially deductible interest (more on this later). The downsides are you put your home at risk if you default and interest rates are often higher than traditional mortgages.

Can an LLC Get a Home Equity Loan?

Yes it is possible for an LLC to get a home equity loan, provided the LLC legally owns real estate property. The LLC can use the equity in that property as collateral for a loan.

However, there are some important caveats when getting a home equity loan under an LLC:

• The LLC must have good credit and income – Lenders will look at the LLC’s financials to qualify the loan, not your personal finances. The LLC needs good credit history and sufficient income from rentals or other sources to qualify and repay the loan.

• Higher interest rates – LLCs are seen as higher risk than individual borrowers, so interest rates are generally 0.5 to 1% higher than a personal home equity loan.

• No tax deduction for interest – If the home equity loan is for business or rental property expenses, the LLC cannot deduct the interest payments from taxes like an individual owner could.

• May require personal guarantee – Some lenders may require the LLC’s owner(s) to personally guarantee the loan, putting your personal assets at risk if the LLC defaults.

Overall the process is similar to getting a personal home equity loan, but expect more stringent requirements placed on the LLC as the borrower. Work with lenders familiar with LLC loans to better understand qualification and get the best rates.

How Does an LLC Get Approved for a Home Equity Loan?

For an LLC to get approved for a home equity loan, the lender will evaluate several factors:

• Credit history – Just like with a personal loan, the lender will check the LLC’s business credit reports to ensure on-time payment history and a credit score over 680. If the LLC is new, the lender may request owners’ personal credit history.

• Income and revenue – Lenders want to see consistent rental income or business revenue that covers existing expenses plus the new loan payment. Tax returns and current rent rolls will be requested.

• Loan-to-Value (LTV) Ratio – The loan amount will be restricted based on the appraised value of the property. Most lenders cap home equity loans at 80-85% loan-to-value.

• Property appraisal – The lender will order a third-party appraisal on the property to verify its valuation and condition. Properties in disrepair may have difficulty qualifying.

• Debt-to-Income (DTI) Ratio – Measures total monthly debt payments (including the new loan) against monthly income/revenue. Many lenders cap this ratio around 50%.

As long as the LLC meets typical credit, income, and collateral requirements, loan approval is a straightforward process. Be prepared to provide documentation on the LLC’s financial standing.

What Property Types Can an LLC Use for a Home Equity Loan?

LLCs can utilize several types of real estate as collateral when obtaining a home equity loan:

• Primary residence – If the owners live in the property at least 50% of the time, even if owned by an LLC, it is considered a primary residence and can qualify for a home equity loan.

• Rental properties – LLCs owning rental properties like single-family homes, townhouses, duplexes can use the properties and their equity as collateral for a loan.

• Commercial buildings – Retail, office, industrial, or multifamily apartment buildings owned by an LLC can potentially qualify, though loan terms may differ from residential loans.

• Raw land – Undeveloped land is typically not eligible for home equity loans. The property needs to be built on and have an established value.

In some cases, multiple LLC properties can be used together to secure one larger loan amount. However, the primary factor is the equity built up in each individual property, versus combined LLC assets. Work with your lender to understand which properties in your LLC portfolio qualify.

What are the Uses for an LLC Home Equity Loan?

A few potential uses for home equity loans for LLC real estate include:

• Fix & flip projects – Access capital for downpayments, renovations, carrying costs, and other rehab expenses for fix and flip residential or commercial projects.

• Rental property improvements – Finance major upgrades like kitchen remodels, roof replacements, exterior facelifts to boost rental income.

• New property purchases – Use loan proceeds as downpayment funds to expand your rental portfolio or acquire commercial buildings.

• Debt consolidation – Pay off higher interest business credit cards or other loans with a lower rate home equity loan.

• Emergency expenses – Tap equity to cover unexpected property repairs or renovations.

• Business equipment – Purchase equipment needed for maintenance, repairs, office operations.

• Working capital – Obtain working capital for marketing, payroll, insurance, utilities, or other operating expenses.

The key is the loan proceeds must be used for legitimate LLC business purposes, whether for real estate investments or general company operations. Personal expenses are not allowed.

What are the Tax Implications of an LLC Home Equity Loan?

There are a few key tax considerations when getting a home equity loan under an LLC:

• No mortgage interest deduction – LLCs cannot deduct interest payments on home equity loans secured by rental properties or other business real estate. This deduction is only available to individual taxpayers.

• Depreciation – If proceeds are used for rental property improvements, those costs may be depreciable over the IRS-determined life of the improvements.

• Point and origination fees – These upfront costs can de deducted over the life of the loan. Closing costs are deducted in the year paid.

• Use of proceeds – Must be used solely for legitimate LLC business purposes, not personal expenses, or could trigger IRS scrutiny or penalties.

• Payments – Principal and interest payments must be made from an LLC bank account to prove business usage.

Consult a tax professional to understand how obtaining an LLC home equity loan may impact your ability to deduct interest, the depreciation schedule, and other impacts.

Finding the Best Home Equity Lender for LLCs

Choosing the right lender is critical when seeking a home equity loan under an LLC. Here are some tips for finding the best lender:

• Look for banks or lenders that have experience writing LLC loans and understand their unique requirements.

• Ask about their LLC loan qualifying policies – do they require personal guarantees or allow credit history from business owners to supplement a new LLC?

• Inquire if they offer higher loan-to-values for LLC borrowers – some lenders may go up to 90% LTV for well-qualified LLCs.

• Compare interest rates and fees – don’t just look at the rate, factor in origination fees, closing costs, and prepayment penalties.

• Understand the fine print – get details on acceptable property types, loan terms, credit score requirements, and use of proceeds.

• Read online reviews – check Google, Yelp, and the Better Business Bureau for feedback on lenders before applying.

The best sources for LLC home equity loans are often local community banks, credit unions, and specialized commercial lenders. Be prepared to shop around to find the right lender match.

Alternatives If an LLC Home Equity Loan is Not Approved

If your LLC does not qualify for a home equity loan on its own, here are some potential alternative options:

• Business credit cards – Apply for a credit card in the LLC name if credit history is limited. Making on-time payments can help build business credit for future loans.

• Business lines of credit – Lines of credit based on LLC assets and owner’s personal credit may offer flexibility and improved approval odds.

• SBA loans – The Small Business Administration guarantees loans made by lenders to qualifying LLCs. May provide better terms than conventional business loans.

• Hard money loans – Asset-based loans from