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

10 Replies

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?

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. 

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?

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

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.  

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!

@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.

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)

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.

@Austin Lee  - 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!!

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.

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