Can an LLC Get an FHA Loan?

Limited liability companies (LLCs) are a popular way for real estate investors to purchase investment properties Forming an LLC helps protect the member’s personal assets in case of a lawsuit However, when it comes to getting a mortgage, LLCs face more challenges than individuals. One common question is, can an LLC get an FHA loan?

Overview of FHA Loans

FHA loans are a type of government-backed mortgage insured by the Federal Housing Administration (FHA) Here are some key features of FHA loans

• Require as little as 3.5% down payment
• Allow gift funds for the down payment
• Have more lenient credit score requirements (580 minimum)
• Offer low mortgage insurance rates
• Can be assumed by a new buyer when selling

This combination of low down payment and flexible credit guidelines makes FHA loans appealing, especially to first-time homebuyers.

LLCs Are Not Eligible for FHA Loans

Unfortunately, the FHA does not permit loans to LLCs. Their guidelines explicitly state that the borrower must be an individual applying for the loan for their primary residence.

The FHA insures loans made by private lenders. Their underwriting guidelines are designed for owner-occupied homes, not investment properties owned by companies.

So in short, no, an LLC cannot directly obtain an FHA mortgage.

Why FHA Avoids Lending to LLCs

There are a few reasons why the FHA avoids lending to LLCs

• Limited Liability – With an LLC, the member’s personal liability is limited. If the LLC defaults, the member’s personal assets are generally protected. The FHA prefers personal liability for their loans.

• Occupancy Requirements – Borrowers must live in the home as their primary residence for at least one year with an FHA loan. But an LLC can’t physically live in a property.

• Mortgage Assumption – FHA loans can potentially be assumed by a new buyer when selling. This is harder to facilitate when an LLC is the borrower.

• Higher Risk – An LLC owning rental property is seen as higher risk than an owner-occupant. The FHA caters to owner-occupied loans.

Alternatives for LLCs Seeking Financing

Just because an LLC can’t directly get an FHA loan doesn’t mean an LLC has no options for financing. Here are two alternatives LLCs can consider:

1. Apply in Your Personal Name

One option is to apply for the mortgage under your own name as an individual, even if the property will be transferred to your LLC later.

The key is that when applying, you must state that you intend for the home to be your primary residence, even if you end up renting it out later.

Once the loan is funded, you can then transfer ownership to the LLC through a quitclaim deed. However, it’s critical that you wait an appropriate amount of time after closing before doing this transfer.

Lenders frown upon quick transfers to LLCs because it appears you misrepresented yourself by claiming it was for your primary residence. Experts recommend living in the property for at least a year before transferring to the LLC.

The downside is you lose liability protection during that first year. But this strategy can work to secure favorable FHA financing. Just make sure you follow the rules.

2. Consider a Portfolio Loan

Another option is a portfolio loan from a private lender. Portfolio lenders offer mortgages they keep on their own books rather than sell to the secondary market.

Portfolio loans typically come with higher rates and down payments than agency loans like FHA. But they offer much more flexibility, including for LLCs.

The exact terms vary by lender, but LLCs are often eligible for portfolio loans. Just be prepared to put up to 25% down and have solid business credit.

Using Personal Credit to Qualify an LLC

When an LLC applies for financing, the lender will look at the creditworthiness of the actual member behind the LLC rather than the LLC’s credit.

The LLC itself does not have a credit report. Lenders need to review the finances and credit of the living, breathing human being who owns the LLC.

That individual will likely have to personally guarantee the loan as well. This gives the lender recourse against their personal assets if the LLC defaults.

So while the borrower is the LLC on paper, an individual’s credit is key for approval and pricing.

Transferring an Existing Property into an LLC

Suppose you already personally own a home with an FHA loan, and now want to transfer it to an LLC for liability protection. Can you do this?

The short answer is no, not without triggering the “due on sale” clause. This clause says the lender can call the entire mortgage due immediately if you transfer title.

To safely transfer into an LLC, you’d need to refinance out of the FHA loan into a mortgage allowing transfers, like a portfolio loan. That or wait until you have 20%+ equity and can qualify for a conventional refinance.

Consult an attorney before attempting this to adequately protect your interests. Improper transfers can put your property at risk.

Alternative Loan Options for LLCs

While an LLC can’t get an FHA loan directly, they aren’t completely out of luck. Here are examples of financing options that LLCs could potentially qualify for:

• Portfolio Loans – Loans held in a lender’s portfolio allow more flexibility than secondary market loans. LLCs are possible.

• Commercial Loans – LLCs can get commercial loans for multifamily or mixed-use properties. More spending requirements.

• USDA Loans – Like FHA, USDA has strict occupancy requirements. But some lenders may permit LLCs.

• Hard Money Loans – Loans from private investors are an option for quick financing, but at high rates and costs.

• Private Money Loans – A private loan from an individual investor is possible. You just need the right connection.

• All Cash Offer – One way to buy without financing is to make an all cash offer, usually at a discount.

The bottom line is that with an LLC, you may need to seek financing outside major conventional and government programs. Shop around with portfolio lenders or explore alternative lending sources.

Using a Special Purpose Entity Instead of an LLC

Some investors use special purpose entities (SPEs) instead of LLCs to hold investment property. An SPE is a legal entity created solely to isolate financial risk.

For example, creating a corporation or limited partnership to purchase each property can limit liability. SPEs makes it easier to “silo” risks across multiple properties.

The advantage of SPEs over using one big LLC is that they can sometimes work with lenders who won’t finance LLCs. For instance, Fannie Mae and Freddie Mac permit mortgages to corporations under certain circumstances.

Talk to an attorney about whether using SPEs could open more doors when seeking financing.

Summary

While the FHA explicitly prohibits lending to LLCs, other options exist like conventional mortgages, portfolio loans, and alternative financing sources. Just remember that the individual member’s credit is a key factor for approval. An experienced mortgage broker can help an LLC navigate financing options.