Bank wont allow my LLC to have a mortgage

23 Replies

Hi All!

Looking for some guidance/advice please. I would like to purchase rentals. I've set up an LLC and then went to the bank to talk about my plan and see what finance options I have. The bank tells me they wont allow an LLC to have a mortgage and that the mortgage needs to be in my personal name... so I ask what is the point in having the LLC? then the business loan rep suggests perhaps the mortgage goes in my name but the rental agreement is with the LLC. Another suggestion was that I use a business loan instead of a mortgage. He is going to call some of his "friends" that are investors to see what they do and I thought I'd check in with you all to see what you think. Do I need to go to another bank? It is common for an LLC to own the rental properties and their mortgages right? or am I missing something...

Thanks!

@Michelle T.

No it is not common for bank to loan directly to the LLC. Especially for residential mortgages. Over time once the LLC becomes seasoned with multiple years of tax returns a door might open with a bank to originate loans in the LLC but you will still have a personal guarantee.

There are some very good threads on these forums that speak directly to your question if you search LLC vs umbrella or just LLC and see what comes up. The LLC loan, if they will even do it for a new LLC, will likely have to be guaranteed by you, personally, anyway, and with higher fees and higher rates and maybe 10-15 year max. We gave up on the LLC even though our lawyer advised us to do it and just went with an umbrella for liability until we reach our limit with conventional financing as we prefer to lock in 30 years at these low rates, and the pass-through liability issues mean we're exposed, anyway.

If what you're trying to do is to get conforming Fannie/Freddie residential notes, then it's not your bank's fault:) Secondary market, which is driven by these 2 GSEs, regulates that residential mortgages can only finance property to people, not companies. These GSEs were set up to facilitate notes to owner-occupants, and even though they will allow non-owner occupied property to be financed, the same rules apply.

There are 2 sides to this issue. One - you want asset protection, which is why you set up an LLC. Two - you want 30-year fixed notes at low cost, which is why you went to the bank asking for these.

You can't have both. You must pick - is the comfortable and safe financing more important, or is asset protection... And, just so you know, if you are thinking of getting a mortgage in your name and then Quit Claiming asset into your LLC, you'd be breaking the Due on Sale clause and triggering Acceleration. As of late, for various logical reasons, the banks are beginning to crack down on this and demanding re-payment in full.

Hope this helps!

Thanks @Frank Romine I guess I've got more reading and learning to do before I can "jump in". Now I'm wondering if I should have even created the LLC...

Yes transferring a mortgage to your LLC can allow the bank to call the note, but my experience is that many (most?) banks will not do so. Nor do they want to. Why call a performing note? If interest rates suddenly rise, then maybe they might be tempted, but first they have to know that the deed has been transferred in the first place. Personally, I have not heard of any bank calling a note in the past several years in my investment circles. Yes it's a risk, but so is leaving yourself exposed to frivolous lawsuits! Whatever you do, protect yourself and your assets. Personally I place my properties into an LLC AND I carry an umbrella policy! I would also suggest talking to your Banker one on one, explain your intentions, and Guage his feelings on it. It is an easy process to deed the property into or out of the LLC as necessary, should the need arise.

@Michelle T. Are you going to keep these properties 30 years without refinancing and pulling cash out? It depends on your long term goals. If you want to buy half a dozen and keep them forever maybe the insurance is good enough and you skip the LLC. If you plan to pull out cash (to by more properties) when you refinance in 5 or 10 years then your 30 year mortgage goes away anyway, you'll own more properties, and have more liability so maybe the LLC route then. Just my opinion. Credit Unions and local banks don't always resell the mortgages. They can keep them "in house" and thus have more flexibility in the terms.

Thank you everyone!

So to clarify that I have understood correctly, in order for my property to be in an LLC it either needs to be:

a) owned 100%

b) a conventional mortgage and I risk the bank demanding payment in full

c) a non-conventional loan

not eacactly.

IF you can get a loan with e LLC, it won't be conventional, it will be commercial, shorter terms, probably have to refinance in 5-7 years.

The whole "must buy in an LLC" is way over rated. How many landlords here have actually lost a law suit that wasn't covered by a decent amount ($1-2m) of insurance? I'll also bet the majority of single member/small LLC's used by landlords could be easily pierced anyway.

@Wayne Brooks is spot on with the 'landlords need to run around scared of a lawsuit' mentality promoted by (who else?) attorneys.  @Ben Leybovich is spot on (of course!) about wanting your financing cake and to eat it too when you seek residential financing terms pledged by an entity. Gotta pick. 

The advise of using your LLC as a mgt co is close, but I prefer my mgt co to be an S-corp. I think you have 2 choices with your new LLC. Close it and move on with lesson learned, or hold it (and report 0 activity for a time) if you plan on buying a 5+ unit multi-family or other commercial property within the next 12 months or so.

To clarify @Michelle T.  -it's the property type that matters, not just the financing method or whether you own it outright or not. Hold commercial property in your business entity, (or multiple condo's or a portfolio of duplexes or homes at the same or similar address) not residential.  This may change years from now if you have 50 houses and millions of net worth, but for now, I wouldn't mix residential property and a business entity.

You need a portfolio lender. I have one that lends to my multi-member LLC at 6.5% fixed, 15 year terms. It's a bank, and they have their own loan committee.

@Michelle T.

 Perhaps you just need to continue shopping for the right bank.

My LLC has mortgages with our local bank. I suggest going in person to talk to small banks. Calling over the phone makes it too easy for them to dismiss you and not take you seriously.

Because my LLC was so new at the time, I did have to personally guarantee the mortgage so if the LLC defaulted, the bank could come after me for the money. They also called it a "commercial loan" since it was to a business even though the mortgages were fairly small. These loans go for 15 or 20 years...I forget at the moment.

You will also have problems with your insurance carriers too. Going the commercial route will cost you lots more in terms of insurance and financing @Michelle T.

If you plan to have a portfolio lender and a portfolio of lots of little houses then an LLC will probably be required by your insurance co as you will have a commercial enterprise. This is a newer development. In the past nobody cared about LLC's.

My LLC has Statefarm for insurance. I don't feel the rates are lots more. You may have to shop around as with anything. I've mentioned somewhere on this forum before that I had a guy at some other insurance company tell me that they couldn't insure the LLC's properties because I wasn't married to my partner! Weird stuff. Just shop around.

Originally posted by @Nicole W.:

@Michelle T.

 Perhaps you just need to continue shopping for the right bank.

My LLC has mortgages with our local bank. I suggest going in person to talk to small banks. Calling over the phone makes it too easy for them to dismiss you and not take you seriously.

Because my LLC was so new at the time, I did have to personally guarantee the mortgage so if the LLC defaulted, the bank could come after me for the money. They also called it a "commercial loan" since it was to a business even though the mortgages were fairly small. These loans go for 15 or 20 years...I forget at the moment.

 Can you share the name of your bank?  

Originally posted by @Ben Leybovich :

If what you're trying to do is to get conforming Fannie/Freddie residential notes, then it's not your bank's fault:) Secondary market, which is driven by these 2 GSEs, regulates that residential mortgages can only finance property to people, not companies. These GSEs were set up to facilitate notes to owner-occupants, and even though they will allow non-owner occupied property to be financed, the same rules apply.

There are 2 sides to this issue. One - you want asset protection, which is why you set up an LLC. Two - you want 30-year fixed notes at low cost, which is why you went to the bank asking for these.

You can't have both. You must pick - is the comfortable and safe financing more important, or is asset protection... And, just so you know, if you are thinking of getting a mortgage in your name and then Quit Claiming asset into your LLC, you'd be breaking the Due on Sale clause and triggering Acceleration. As of late, for various logical reasons, the banks are beginning to crack down on this and demanding re-payment in full.

Hope this helps!

While I absolutely agree with what Ben says, I'll quibble on one point. Yes the banks are beginning to crack down, but there are a lot of loans out there and there have been very few incidents of the banks exercising the DOS clause, at least to judge by what people are saying on BP. Even if they do all you have to do is move it back into your name.

The Limited Liability Company ("LLC") owns the property, takes out the mortgage, signs the leases. Find another Lender who will work with you. They will most likely loan to the LLC as long as you personally guarantee the mortgage.

Thanks again everyone! 

@Nicole W. and @Judy P. I did find another bank. I found a local credit union that deals with other investors and they all have their properties in LLC's. I'm happy to be able to fill another blank line on my Team list. Next up CPA and Insurance agent!

So many things I want to comment on in this thread.

In no particular order:

To the person that said I use an S-Corp instead of an LLC. They are one in the same for tax purposes and for liability purposes. There are only two ways to be taxed from the IRS's perspective. As a disregarded entity (i.e. the entity itself does not pay taxes, but passes them through to the owners directly) or as separated from it's owners. An LLC can be taxed in the exact same fashion as an S-Corp, C-Corp, Sole Proprietor, Partnership, etc. The IRS has a form 8832 which is how the entity elects to be taxed. So having stuff run through an S-Corp over an LLC is irrelevant.

Owning a property in an LLC vs. personal ownership. For single family homes, I believe LLC's to be cumbersome ownership structures. For Multi-Family LLC's make sense because if you're using commercial loans you'll be refinancing every 5-10 years. Refinancing in a different name than currently titled is cumbersome. So put it in an LLC, use commercial loans and never look back. The simple answer is if you are using residential loans you are better off titling in a personal name and if you are using commercial you are better off titling in the entity name.

If the property you are buying is not currently stabilized, you will not be getting PERMANENT financing through Fannie/Freddie on the commercial side. Expect to personally guarantee the loan until the property is stabilized. (This is not a bad thing as many banks, while requiring a personal guarantee, will also lend at higher LTV's than non-recourse financing).

Know when to expect Interest Only as appropriate and when not to. As a lender, the biggest red flag for someone you know doesn't have very much experience is when they ask for terms that any seasoned professional knows are out of market. Excessive I/O, out of market amortization schedules, out of market interest rates, etc. If you go to a lender with expectations that are WAY OFF they won't take you seriously so you'll have more difficulties getting financed.

Originally posted by @Michael Worley :

So many things I want to comment on in this thread.

In no particular order:

To the person that said I use an S-Corp instead of an LLC. They are one in the same for tax purposes and for liability purposes.

This is simply not true. As an example, all income flowing through an LLC is subject to self employment tax (Not talking rental income). As an S-Corp you can take a salary and reduce the amount of income subject to the SE tax. For every $100K of income flowing through either entity you will see $10K less of tax liability with an S-Corp. Caveat being if you are talking about rental income it should go through an LLC as opposed to the S-Corp. For the record I would stick with operating as a sole proprietor and buy insurance.

This thread is full of advice, some good, some down right awful and incorrect. Here is the basics, Most banks do not hold onto the loan they may. They sell off the loan to a loan service company that is backed by Fannie Mae or Freddie Mac. This is why your bank doesn't do the loan to the LLC, because their ability to resell it, make a quick profit then use that money on another loan is drastically reduced.

So instead go to a lender that understands small business, and holds the loan (Portfolio) in house. 


If you do that, you can indeed have both unlike what some people have posted. How do I know this? BEcause I have and continue to PERSONALLY do this!!! 

Here is my question, do you want to invest quickly? cheaply and roll the dice on long term issues/liability? Or do you want to take a little longer time now, ensure you have the right business foundation to build long term legacy wealth?  (FYI Fannie and Freddie cap loans in your own name at 10, so once you hit 10, you are done anyway)

Originally posted by @Rob Beland :
Originally posted by @Michael Worley:

So many things I want to comment on in this thread.

In no particular order:

To the person that said I use an S-Corp instead of an LLC. They are one in the same for tax purposes and for liability purposes.

This is simply not true. As an example, all income flowing through an LLC is subject to self employment tax (Not talking rental income). As an S-Corp you can take a salary and reduce the amount of income subject to the SE tax. For every $100K of income flowing through either entity you will see $10K less of tax liability with an S-Corp. Caveat being if you are talking about rental income it should go through an LLC as opposed to the S-Corp. For the record I would stick with operating as a sole proprietor and buy insurance.

Actually, LLC is NOT an IRS tax entity. It defaults to sole proprietor but with form 8832 an LLC can be taxed as an S-corp, C-corp, partnership or Sole Proprietor. If you think LLC is a tax entity I encourage you to investigate it more thoroughly.

I have an LLC that has one 10/5 ARM in its name at 4.25% and one 15 year fixed at 4.25%. Both personally guaranteed. Held by local credit union.

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