Mortgage for an LLC?

Question

Hi there!

I’ve started an LLC to buy my first residential investment property. I will be able to provide a 20% down payment through the LLC, but the question I have is: don’t I need to personally guarantee the loan because the LLC does not have credit history? I’ve heard it is bad practice to personally guarantee a business loan.

What do you pros recommend? How can my LLC get a loan?

Robin Simon · Answer

This is very common for "DSCR Loans" - can generally go through the LLC, it can be new and not an obstacle - but you would be personally guaranteeing the loan.  However, the guaranty would only apply to the specific property after the lender has exhausted getting funds back after a foreclosure - so its less a worrisome guaranty than if you were just overall guaranteeing a business loan, since the real majority of the collateral and recourse is going to fall on the property

Carlos Valencia · Answer

Hi Jaqueline,

You can use DSCR loan product to buy under an LLC. DSCR stands for Debt service coverage ratio. This loan product is an investment loan product that you have to put down 20-25% down. Easy loan product to get approved for as they only look at the properties monthly rent/over mortgage payment. Ideally the lender prefers 1:1 ratio or better in order to get better terms. If the rents are under less than the mortgage payment they will lend you the money at higher rate. In order to get pre approved all the lender looks at is your credit, assets, properties performance and you have to own a property as primary or investment you cannot use DSCR loan product if your a first time homeowner.

@Albert Bui @Matthew Kwan @Kin Meng Sio

Stuart Udis · Answer

Account Closed Whether the LLC has been in operation or not, if you purchase the property through a LLC expect real estate loans to have recourse meaning you will personally guarantee the loans. This will remain the case until you reach a point where non recourse debt is available but it’s rare and generally only applicable to larger transactions where leverage is customarily lower and there remains carve outs for “bad boy acts”.

I frequently see posters on here say “they can’t get a loan for properties owned by an LLC” but I suspect they incorrectly thought that they would not have to personal sign on as a guarantor. That’s not the case.

Stuart Udis · Answer

@Matthew Crivelli. This is simply not correct. A single member LLC, if operated correctly without any bad acts that would allow the veil to be pierced will protect the member of the LLC. You appear to be confusing having knowledge of who the LLC member is and being able to hold that individual personally responsible. They are very  different and it’s an important distinction to understand.

However I agree having appropriate levels of insurance is important. The insurance is what plaintiffs attorney are going to chase. It’s the path of least resistance when it comes to obtaining compensation for their clients (and themselves). A judgement against the LLC without insurance to cover the judgment amount or even the seeking recovery from the individual member(s) will come secondary.

Jacob Sherman · Answer

These loans are considered a commercial loan for real estate purposes . You would be the gurantor of the loan the but title would be held in the LLC . You'd go off of your credit history . Definitely can 20% down if the rent covers the mortgage

Stuart Udis · Answer

Account Closed No, personally guaranteeing the loan will not pierce the corporate veil. A simple web search for piercing the corporate veil will outline the Do’s and Don’t’s as it pertains to operating a LLC with this in mind. Generally speaking operate the LLC like a business, follow the operating agreement procedures, properly fund the LLC for the business operations you intend on performing and avoid commingling of  funds.

Separately, piercing the corporate veil will rarely be the first option or the priority of plaintiffs attorney. Most fail to realize this as well. They are typically chasing the insurance carrier as that’s often the easiest source of payment available.

Account Closed · Answer

I'm amazed by this community; thank you all so much for your help!

Account Closed · Answer

Since DSCR loans are property-specific, I suppose this means that I can’t get pre-approved and shop around. Do you find that people send lenders a couple of properties to get DSCR loan approval for, or do people just commit to one property early on and go for the DSCR loan? Is it a laborious process as a lender to get these loans approved?

Timothy Hero · Answer

Even if the LLC had credit, DSCR lenders always go off your personal credit, but as stated above, yes, you'd have to PG it. If you make your payments as expected, there's no more risk than doing a normal mortgage. The loan isn't on credit, which helps the DTI.

Just make sure the lender doesn't make you sign an Equity Pledge Agreement at closing.

Mortgage for an LLC?

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