Ive been reading a-lot about lending and how to get approved for the loan you want, I recently came across a section about how creating a LLC will turn residential lenders away from you. I was planning to create a LLC when the time came to buy my first property but now Im having second thoughts. Has anyone out there created a LLC and ran into trouble when it came to lending ?
Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
3y
If your first property is an investment property, then you won't be able to enjoy benefits of an FHA residential loan anyway. It's much better to have the limited protection you get from purchasing in an LLC. You'll have to get a conventional loan for your LLC and likely will personally guarantee the loan.
Realtor · Ogden, UT · Member since 2019 · 338 posts · 415 votes
3y
Unless your LLC is well established, it won't qualify for a mortgage. You almost always have to use your personal standing and credit to qualify, purchase, and then you can simply move properties into the appropriate LLC and/or trust.
Qualifying on your own and moving properties into an LLC will have the same lending effect as if you just kept them in your personal name. I believe most lenders count 75% of the rent amount as income so if your mortgage is around that same percent, they'll have little effect on qualifying over and over.
Ive been reading a-lot about lending and how to get approved for the loan you want, I recently came across a section about how creating a LLC will turn residential lenders away from you. I was planning to create a LLC when the time came to buy my first property but now Im having second thoughts. Has anyone out there created a LLC and ran into trouble when it came to lending ?
Hi Colby,
With conventional financing, most if not all conventional lenders will not allow you to close in a LLC, especially if it's for a primary residence. You would have to close in your own name. If you're trying to close in an entity for say, investment properties, alternative financing and business purpose loans will allow you to close in a LLC.
Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
3y
If your first property is an investment property, then you won't be able to enjoy benefits of an FHA residential loan anyway. It's much better to have the limited protection you get from purchasing in an LLC. You'll have to get a conventional loan for your LLC and likely will personally guarantee the loan.
Lender · rate.bid · Member since 2022 · 324 posts · 62 votes
3y
As an investor, although you are dealing with residential property (unless you are also active in the commercial space), the transaction itself is a categorized as a business or commercial loan. You certainly want acquire any investments with or through an entity of some sort as opposed to doing so in your personal name.
Dayton, OH · Member since 2022 · 10 posts · 2 votes
3y
Hello there,
It's my understanding that the LLC alone does not offer you protection, it merely separates you from your business, hence the limited liability aspect. You are not liable, your company is. As for protection, you need insurance for that, and not necessarily an LLC, if protection is your goal. If you do not separate yourself completely from the LLC, you will be considered one in the same, and you will have liabilities. I heard you can put your properties in a land trust and then transfer them from you to your LLC if you wanted anonymity of the ownership your properties, that's just one aspect. But I did read and hear that traditional lenders don't like LLCs. I believe it is because they want you to be personally responsible for that loan, and with an LLC, you are separate from your company and cannot be personally responsible for debts. I am new, and I hope my choppy explanation offers some help.
Lender · rate.bid · Member since 2022 · 324 posts · 62 votes
3y
The separation is the protection. The statute literally says the LLC is a distinct entity from its member(s). If not managed properly however, there is always someone looking for an excuse to pierce the corporate veil.
There are lenders who will not lend to you (especially as a business or investor) unless you are incorporated to legally separate you from the LLC.
When you are dealing with multi million dollar transactions, often the only credible security the lender can obtain for the loan is whatever business asset is used to secure the loan unless the debtors has significant assets.
That's interesting, thanks for letting me know. The protection is only there if you operate properly, but it's only a seperation of accounts and assets that will protect you from being personally liable. You still need insurance to have actual protection. That was my understanding, at least.
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
3y
@Colby Zeller is you obtain a conventional loan based on your W-2/tax returns/DTI for a either an owner occupied or investment 1-4 unit property and finance through a bank/Credit union, you cant close in an LLC.
Business purpose lenders (bank statement, DSCR) can close in an LLC but you cannot live on the property. I work in Non Qm and some lenders require LLC vesting but not all of them.
Lender · rate.bid · Member since 2022 · 324 posts · 62 votes
3y
I still sense a slight confusion in regards the use of the word 'protection'.
If you own or operate an LLC and the LLC goes out and incurs some business debt.. there is always a probability of default. The idea (should a default in fact occur) is to keep the creditors wandering hands/eyes on the LLC.. as opposed to having the ability to reach also for the debtors personal assets if the LLC is unable to cure the default/debt.
So the protection provided by an LLC structure is from personal liability for the debts of 'another' and that is whether or not there is an insurance policy. This is what makes the LLC structure different from say.. a sole proprietorship.
In terms of insurance, any business regardless of type or form often does have to get some sort of insurance. The insurance is there to pay out any claims that arise against whoever is named as beneficiary on the insurance policy -- in this case the LLC.
Absent of the insurance policy.. if the LLC were unable to pay a claim against it, someone can force or commence a foreclosure on the assets of the LLC. So its a different sort of protection.
I am not an expert by any means, but what I have read/heard, is that you can't close on residential properties using an LLC but can transfer the asset afterwards. The main thing to watch out for in this process of transferring is getting a written approval from the lender that by switching the title over to the LLC you don't incur a "due on sale" clause, that requires the complete amount of the loan due at time of sale/transfer. I hope this helps.
I still sense a slight confusion in regards the use of the word 'protection'.
If you own or operate an LLC and the LLC goes out and incurs some business debt.. there is always a probability of default. The idea (should a default in fact occur) is to keep the creditors wandering hands/eyes on the LLC.. as opposed to having the ability to reach also for the debtors personal assets if the LLC is unable to cure the default/debt.
So the protection provided by an LLC structure is from personal liability for the debts of 'another' and that is whether or not there is an insurance policy. This is what makes the LLC structure different from say.. a sole proprietorship.
In terms of insurance, any business regardless of type or form often does have to get some sort of insurance. The insurance is there to pay out any claims that arise against whoever is named as beneficiary on the insurance policy -- in this case the LLC.
Absent of the insurance policy.. if the LLC were unable to pay a claim against it, someone can force or commence a foreclosure on the assets of the LLC. So its a different sort of protection.
Yes yes, I wasn't very clear on which protection I was writing about. I meant when it comes to getting sued, because a lot of people thing that the LLC alone will protect you from that. You can Sole Prop and just get insurance for that.
Ive been reading a-lot about lending and how to get approved for the loan you want, I recently came across a section about how creating a LLC will turn residential lenders away from you. I was planning to create a LLC when the time came to buy my first property but now Im having second thoughts. Has anyone out there created a LLC and ran into trouble when it came to lending ?
Hey Colby
Here are some tips to help you structure your real estate journey.
Start going to REIA's and Meet ups in your area. You'll be able to put together a team of folks including Realtors, Lenders, Insurance and title people. Find one in each category and let them refer you to each other.
Use conventional financing or FHA financing for units first before you start buying investment properties. Live in them for the required time and then buy another. You'll be able to get the most favorable financing and subsequently the most profits for years to come.
Don't be afraid to buy. If the numbers work, pull the trigger.