rental loans hurt my persoanl credit worthiness

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rental loans hurt my persoanl credit worthiness

Don Chambers
Investor · Warner Robins, GA · Member since 2011 · 83 posts · 15 votes

How can I finance my rentals without it hurting my personal ability to get a loan?

I have 20 rental properties. One is owned free and clear, 4 have conventional 30-yr fixed loans, and the other 15 have 3-year commercial balloons with local banks. So far, I have had no problem rolling the loans over when the balloon is due.

Today I was turned down for a car loan with a credit union because of the number of mortgages I have (they only mentioned the number – no debt-to-income issue). In the past, I had trouble refinancing my personal residence because of the number mortgages I have. I have even been turned down for a credit card because of these loans.

When dealing with the commercial loans, and a bank’s business department, I don’t seem to have any problems. They know how to analyze my income, adjust for depreciation, etc. But when I try to get any type of non-commercial loan (car, personal residence, credit card, etc.) I have problems.

I have very little personal debt. I have a lot of debt on the rentals but they cash flow. I have saved up over $70k in my rental property bank account. That sounds like a lot, but it will only pay off one or two of the properties. I prefer having the cash cushion.

I find that it is very difficult to get a conventional loan when you have more than 4 mortgages, and impossible after 10.

One idea is to get a blanket mortgage where I have one mortgage covering several properties. If I can reduce the number of mortgage perhaps I can get a few more 30-yr fixed and increase my cash flow. (I really don’t like short-term financing on a long-term investment).
Does anyone know where to get a blanket mortgage?

Are there any tactics for getting these rentals off my personal credit report?
I know I am responsible for the loans, but they are handled by my rental LLC. It would be good if could confine them to the LLC so they do not interfere with my personal situation.

Any ideas?

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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
11y

@Rob K. 

The loan person at the bank will listen to this and say 'I think we can do this.' After all there are only 3 loans on your credit report. You will go through all the hoops and balance a pencil on your nose for 30 seconds as required, and the your bank guy will ship off the package. The underwriter will ask 'do you have any interest in LLCs?' and 'do these LLCs own property that is financed?' Two 'yes' answers and they will add in the newly minted 5 loans. For single member LLCs and for multi-member LLCs where you may have a small (but non-zero) interest, they add 1 to the count of mortgages held. Their wording: "Joint or total ownership of a property that is held in the name of a limited liability company (LLC) or partnership." There are a few exceptions: raw land, timeshares (vacation??), mobile homes that are not permanent, 4+ (commercial loan) property, and (doesn't apply here, but interesting anyway) S-Corp owned and financed property.

So you would be at 8 (3+5) financed properties by their count, not including your personal residence, which is less than 10... and that would (as far as I can see) "...comply with the eligibility, underwriting, and delivery requirements described..." in eligibility section B2-2-03.

I would consider this option only if the collective refinancing activity has material benefits. There are other loan considerations (DTI, cash reserve requirements, etc.) that are beyond the number of financed properties, but the commercial lender may not follow the same underwriting guidelines as a FNMA/GSE loan. I'd make sure to get a few other set of eyes on it (like the bankers) to make sure all other eligibility requirements are met.

Reference: B2-2-03, Multiple Financed Properties for the Same Borrower ( pg. 254-257)

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    13y

    So if I read this right, the details of the 15 commercial loans are on your personal credit report? Were these properties in the LLC when they were financed, or in your personal name? I ask these questions because loans in an LLC, even with one or more LLC member's personal guarantee, do not show up on any LLC member's personal report. At least that's my history.

    The GSE loans do show up, but that's because the loans are really in the member's name. The transfer to the LLC was done by the closing attorney as part of the loan package on the day of funding/recording.

    0Reply
  • Don Chambers
    OP
    Investor · Warner Robins, GA · Member since 2011 · 83 posts · 15 votes
    13y

    All the properties are in my name. I manage the business with the LLC. I closed in my name so I could get the GSE loans, and then continued it out of habit.

    If i move the property into the LLC will that remove the details from my credit report? I am still personally responsible for the loans?

    I am working with a local bank for a blanket loan. I could probably move these properties to the LLC when I move to the blanket loan.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Changing the ownership of the property won't have any (good) effect on the loans. The only way to get the loans out of your name is to refinance. If you change ownership, you violate the due on sale clause and that might result in the lender calling the loan. Probably won't, if the ownership doesn't really change, but you are taking that risk.

    0Reply
  • Don Chambers
    OP
    Investor · Warner Robins, GA · Member since 2011 · 83 posts · 15 votes
    13y

    I am about to refi several with a local bank that will do a blanket. Is there a benefit to moving to an LLC when I do the refi?
    Will it show on my credit report? I'm sure I will be personally responsible for the loan.

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    13y

    They'll probably require a personal guarantee, but it is unlikely they'll report to the personal credit bureaus if you close in the name of your entity. You should ask the lender about that.

    Closing in your entity's name should help out a lot.

    What are the terms of the blanket loan? Why not just refinance them individually and give yourself some flexibility instead? Would this increase your transaction costs considerably?

    0Reply
  • Don Chambers
    OP
    Investor · Warner Robins, GA · Member since 2011 · 83 posts · 15 votes
    13y

    I sought out the blanket because the conventional loans have a limit on the number of mortgage you can have.

    I want to roll the lower value houses into a blanket mortgage. Then I can refi the high value ones with a 30-year fixed loan.

    Moving into an LLC, and refiing in that name, may get the loans off my credit report and solve the problem.

    I have a couple of banks that were easy to deal with. No inspections, loan based on apprasial (not cose), etc. But I have run into a dollar limit with them. If I can move loans from them to the blanket at the other bank then I can do more houses with them. Each house in the blanket will be individually valued.

    I think i will be able to sell one, pay off that portion, and remove it from the blanket. I am waiting on that answer now.

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    13y

    Don, it's going to work out Ok.

    I guess this is why a lot of us say use an LLC. These properties are not your residence, they are investments. So they should have been acquired by the business via the LLC. This is true of all company assets. Regarding "I closed in my name so I could get the GSE loans, and then continued it out of habit." We (BP Nation) do understand the first part about the great GSE giveaway, as long as you transfer it to the LLC when you close. The second part is the problem that didn't need to be... by closing in the LLC your credit wouldn't be impacted nearly as much if at all.

    So this thread is a good resource for all those who ask "should I buy in an LLC or my own name?" Make the habit to buy and put assets where they belong... in the LLC.

    The LLC really is still under your control. Along these lines, one of the greatest capitalists summarized his thoughts as "The secret to success is to own nothing, but control everything." Nelson Rockefeller.

    0Reply
  • Sib Bahjat
    Investor · Colleyville, TX · Member since 2012 · 70 posts · 7 votes
    13y

    I purchased a property last month under my personal name. I just deeded it over to my LLC this week. I do understand the due on sale clause. Is the property still going to show up under my personal name, or LLC? What is the best approach to take in the future in order to avoid the same thing Don is facing? I appreciate everyone's input.

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    13y
    Originally posted by Don Chambers:
    I think i will be able to sell one, pay off that portion, and remove it from the blanket. I am waiting on that answer now.

    You'll want to get the particulars of this. The release clauses matter and the lender should maintain a level security interest by releasing one of the properties, but not do something crazy instead. You may want to have an attorney review these clauses in the agreements. There is a short thread about this here:

    Release Clauses For Blanket Loans

    You should also check on which properties they're okay with you selling in pieces.

    0Reply
  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    13y
    Originally posted by Sib Bahjat:
    Is the property still going to show up under my personal name, or LLC?

    Likely if it a standard FreddieMac or FannieMae underwritten loan it will show up on our credit report. It doesn't matter if you change it to an LLC later.

    Commercial loans (even if they are personally guaranteed) typically will NOT show up on your personal credit report.

    There is a risk reward. You can get cheap debt with great terms, just not too much of it :).

    0Reply
  • Rob K.
    Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    11y

    I see that this is an old thread, but I have a question that pertains. @Chris Martin might know the answer, or maybe @Bill G

    I have about 14 mortgages in my personal name and 1 in an LLC that was obtained with a commercial bank. I recently pulled my personal credit report and the commercial loan is nowhere to be found. If I took out five more commercials loans on five free and clear properties, I could pay off eleven mortgages in my personal name. This would leave only three mortgages in my personal name.

    The question I have is would a regular bank see it this way that I only have three mortgages? It would allow me to refinance a vacation home and get long term financing with a low rate. Or, would they still look at the commercial loans in a single person LLC and say that I'm over the mortgage limit?

    Does anyone have any experience with this?

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    11y

    @Rob K. 

    The loan person at the bank will listen to this and say 'I think we can do this.' After all there are only 3 loans on your credit report. You will go through all the hoops and balance a pencil on your nose for 30 seconds as required, and the your bank guy will ship off the package. The underwriter will ask 'do you have any interest in LLCs?' and 'do these LLCs own property that is financed?' Two 'yes' answers and they will add in the newly minted 5 loans. For single member LLCs and for multi-member LLCs where you may have a small (but non-zero) interest, they add 1 to the count of mortgages held. Their wording: "Joint or total ownership of a property that is held in the name of a limited liability company (LLC) or partnership." There are a few exceptions: raw land, timeshares (vacation??), mobile homes that are not permanent, 4+ (commercial loan) property, and (doesn't apply here, but interesting anyway) S-Corp owned and financed property.

    So you would be at 8 (3+5) financed properties by their count, not including your personal residence, which is less than 10... and that would (as far as I can see) "...comply with the eligibility, underwriting, and delivery requirements described..." in eligibility section B2-2-03.

    I would consider this option only if the collective refinancing activity has material benefits. There are other loan considerations (DTI, cash reserve requirements, etc.) that are beyond the number of financed properties, but the commercial lender may not follow the same underwriting guidelines as a FNMA/GSE loan. I'd make sure to get a few other set of eyes on it (like the bankers) to make sure all other eligibility requirements are met.

    Reference: B2-2-03, Multiple Financed Properties for the Same Borrower ( pg. 254-257)

    1Reply
  • Azeez K.
    Investor · Atlanta, GA · Member since 2013 · 646 posts · 392 votes
    11y

    @Don Chambers great post

    Lots of good points made by the members of BP community and provides a great learning opportunity for newbie and experienced investors. I am not addressing specific questions in the post but providing some insight based on my experience.

    In my personal experience I buy properties under my LLC, loan is under the name of the LLC. For my first property I got multiple confirmations (I wanted to be 100% certain) from my banks that this will not be reported on my personal credit because it is under the name of the LLC. I wanted to avoid the problem you are currently facing. I am happy to report that this and other properties done via LLC the same way don't show up on my personal credit report. However, there are a few drawbacks

    1. Finding the right bank who will provide mortgage under an LLC vs personal name. Typically small credit unions, local banks where you have an existing business relationship etc offer but it could be hit or miss

    2. Interest rates are higher for these small business loans/commercial loans

    3. Higher rates will reduce your cash flow.

    4. Lot more work and accounting dealing with multiple LLC etc

    Anyways great post. I personally learned a lot from your post and the insight of other BP members. BTW what kind of rates are you getting from the local banks for the blanket loans?

    0Reply
  • Joe Impagliazzo
    Real Estate Lender · Newport, RI · Member since 2014 · 182 posts · 33 votes
    11y

    @Rob K. 

    In order to not count the LLC property's the loans must not be under your personal name, and the property's claimed on the LLC tax returns. Even if a loan is not in your personal name, but the property show's up on the Sch. E of your 1040's and list's mortgage interest underwriting will count it as a personal financed property.

    0Reply
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