Can I make a loan to my business and then later refinance it with traditional bank?

Question

So I put an offer on another property today that will be a buy and hold. It will need about $15k in rehab work. I would like to make a loan for the purchase price plus rehab to my business (an llc) from my personal account with the intent of getting it refinanced once all work is complete. Will a bank be ok with this? It just seems like it will be easier than trying to do a cash out refi on a free and clear property. Any thoughts?

Andy Collins · Answer

Since your putting this in an LLC, you can't get a conforming mortgage, you will have to use a commercial loan.

If you want to go the conforming mortgage route, you can't loan the money (like a hard money loan) to yourself, but a brother, cousin, etc, that doesn't live with you can (I've done it before),, you have the title company draw up a loan with the closing paperwork.

When you finish with the rehab you go to 'refinance' your mortgage with a traditional lender, not a  problem (or at least I haven't had one).

My mother was getting 1% on savings, and I was paying 14% interest to a hard money lender, which made no sense, so we started doing it this way, she got 6% interest, and I felt like I was helping her out,,everyone won.

Don't have a spouse loan you the money, keep it someone that doesn't live with you (I know someone that did that and it caused some issues)

Nilesh Makhija · Answer

Account Closed - Sounds like I had the same issue and I am going to use the sugegstions mentioned here. We both have similar vision and what we want to achieve.

Great to have you here!!

Account Closed · Answer

Thanks for the advice everyone. @Andy Collins , I think that is a great idea. I may have a family member who would be willing to do that.

Account Closed · Answer

Thanks @Phil B. . I may just have to hope to get a cash out refi and bypass the loan from my personal account. I was just hoping to find an easier way to get my cash back out. Like I said though, I don't want to flirt with fraud!

Account Closed · Answer

Anyone else know how the banks would view this? I definitely don't want to cross the line to any kind of fraud.

Account Closed · Answer

Thanks @Curt Davis . I agree the banks may not like it which is why I'm asking. I definitely don't want to flirt with mortgage fraud! I happen to have a meeting with a new prospective lender next week, so I'll ask.

Does anyone have any experience with anything like this?

Chris Martin · Answer

These type of transactions are not Arm's Length Transactions. Pretending for a moment you don't have an LLC, this type of transaction is still problematic for investment properties. See https://www.fanniemae.com/content/guide/sel041514.pdf page 184.

The 'better' alternative is as @andy points out  to borrow from an independent party, with recorded security interest, proof of loan term compliance... all in an arm's length transaction.

Walt Payne · Answer

@Austin Lee

I would not do it as a mortgage. Just loan the money to your LLC as an unsecured loan. After all, their credit rating with you should justify that, right? ;) That way you are getting a bank loan using the property as security, and there should be no issue with intended use. Whether you repay the original loan, or invest in a new property is not relevant.

BTW you would have to wait to do the loan, since banks will not loan against a new purchase and include the rehab costs, or loan a percentage of FMV after rehab, they will only lend using the purchase price for 6 months. But that would be true of a refi also.

Phil B. · Answer

If you can obtain the loan with full disclosure, there will be no trouble but I don't think the bank will go for it.  You cannot tell them the use of funds is to buy and rehab a property at that point since you already funded it yourself.  If you do, then strip the LLC of that loan money to pay yourself back, you can get in trouble - you lied about the use of proceeds to get a loan.

The use of funds is to pay yourself back and that needs to be disclosed.  If you can manage to close a loan somehow with that disclosure, you'll be fine as long as the bank clearly understands what the money is being used for.

Curt Davis · Answer

I highly doubt this will work.  You should consult with your lender on this issue but highly doubt it.  Find a lender who will do a fast cash out refi.

Can I make a loan to my business and then later refinance it with traditional bank?

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