10 Best Practices for Getting a Mortgage in an LLC

“You’re self-employed. You’ll never get a mortgage.”

If you’re making money on your own, you’ve likely heard these statements before. And, you’ve likely believed them.

But, we’re here to break these rumors.

You can get a mortgage if you’re self-employed. In fact, the best LLC mortgage lenders can help you get the best mortgage deal depending on your situation.

In order to get the mortgage deal that you’re looking for, keep reading. We’re going to cover everything you need to know about getting a mortgage for your LLC. And, we’re going to share all the tips and tricks that you need to use when you’re looking for an LLC mortgage.

1. Get All of Your Legal Affairs in Order

Before you start looking for the perfect mortgage deal, you need to get all the legal affairs for your LLC in order. If you’re not caught up with everything your LLC needs, you won’t be able to get the mortgage that you need.

The key here is to make sure that you’ve got all of the documents related to your LLC. With these regulations and documents in order, you’ll be ready to start looking for the mortgage that you want.

Keep in mind that self-employed mortgages include all mortgages in which 25% of the mortgage is owned by a business or partnership.

Choose the Name of Your LLC

You need to have a name to put across your paperwork. While the name won’t influence the terms of your mortgage, it’s still important to make sure that you’ve got a name that you’re proud to write on this (and many other future) applications.

Keep in mind that your LLC cannot have the same name as another LLC within your state.

File the Articles of Organization

If you haven’t filed your Articles of Organization yet, your LLC isn’t official. In some states, this document is referred to as the Certificate of Formation. In others, you may hear the term Certificate of Organization.

All of these documents tell your state the basic details of your LLC and what you want it to be. 

Create an Operating Agreement for Your LLC

Most states don’t require an operating agreement, but you should go ahead and get this done. This agreement states how your LLC will run on a daily basis. 

If you don’t have an operating agreement, the state will default to the general law for LLCs.

Read and Follow Tax and Regulatory Requirements

In order to get your own LLC-associated mortgage, you need to be compliant with tax requirements and regulatory requirements.

You need to know your EIN (Employer Identification Number). And, you need to have your business license.

On top of that, you should be up-to-date with your sales taxes and employer taxes.

Bring the Relevant Paperwork

If you’re registered as an LLC, you’ll need to gather several relevant documents. However, the process is similar to the process that salaried workers have to go through. So, it’s likely that you already understand the process if you’ve had to go through it before.

These are the common documents that lenders ask for during the application process:

• Your federal income tax returns for the last two years, including your personal and business taxes
• All of your recent bank statements for the relevant accounts
• Your year-to-date profit and loss statement that will tell the lenders what your revenue, expense, and net income are
• A copy of your business license
• A letter from a certified public accountant that states you’ve been in business for at least two years
• Your employee identification number
• A copy of your credit report from Equifax, Experian, or TransUnion

Once you have all of this information together, you can meet with your LLC mortgage lender to start talking about your mortgage.

2. Explore Your Mortgage Loan Options

Self-employed consumers are eligible for most types of mortgage loans. That’s why you should take time to explore different kinds of loans before settling for one of the first offers that you get. 

You can use Fannie Mae, Freddie Mac, FHA, and other kinds of loans. You could even consider private loans that don’t go through large corporations. 

Some mortgage loans are specifically for LLCs.

For example, you could opt for the Bank Statement Loan Program. These kinds of loans don’t require tax returns. But, you can still get competitive rates with no private mortgage insurance.

There are also no documentation loans and stated income mortgages.

Before you commit to a specific mortgage loan, you need to make sure that you’ve exhausted all other options. No matter what your financial goals are, there’s bound to be a great mortgage option out there for you.

3. Budget Your Home Needs and Wants

Before you can determine how much of a loan you need, you need to figure out what kind of home fits into your budget. You have to consider what kind of home you need and what kind of home you want.

Think about what you want in a house. How many floors do you want? What kind of layout do you want for the home?

Once you consider where you want the house to be and what kind of house you want in that area, you can start planning the finances behind the purchase. Whether you have a budget range already or you’re looking at what kind of budget you need for the house you want, you can make plans for your future purchase.

If you have a budget range already, you can look for the house that you want that’s in the range that you’ve set.

If you have a location and kind of house without a budget, you can use the location and type to set a reasonable budget for your wants and needs.

You can use a mortgage calculator to estimate what your monthly payment may be with the amount of house that you want to buy.

4. Get the Lowest Interest Rate

The interest rate on your loan matters. It determines how much money you’re going to spend for the loan over time.

The higher the interest rate, the more money you’re going to pay over the lifetime of the loan.

To save money, you should try to get the lowest interest rate possible. Here are a few things you can do to lower the interest rate of your mortgage loan:

• Improve your credit score
• Review and edit your credit report
• Offer the largest down payment you can comfortably afford
• Research several different lenders before settling on your mortgage loan
• Choose a loan that has a shorter term
• Consider paying the costs of your loan upfront

If you’ve done all of these things, you just need to shop around for the best mortgage loan for you. This may involve getting quotes from multiple companies before deciding on the kind of loan you want and what lender you want to get it from.

Keep in mind that you could also opt for an adjustable-rate mortgage. These kinds of mortgages have moving interest rates that change according to the current market. 

These mortgage loans may be a gamble during times of high interest rates. However, they can be beneficial during times where the interest rates are low.

You may want to perform some market research before you opt for this kind of mortgage. But, it’s likely that your interest rates may even out with a consistent interest rate if the rates are fluctuating evenly.

5. Boost Your Chances of Getting Approved

In order to enjoy the home that you want, you have to get approved for the mortgage loan. That means that you have to have all of your finances ready and in order by the time that you talk to the lender about mortgage terms and conditions.

Here are some of the things that you should look at before you talk to the lender.

Know and Improve Your Credit Score

First off, you should know what your credit score is. You should look at it at least once a month so that you can see if there are any major changes that come with your financial decisions.

Month-by-month, you should be looking at your credit score to see if there are any major changes. If there are, you should solve the problem immediately. The longer you wait, the harder it’s going to be to fix the issue.

In order to improve your chances of getting a better mortgage offer, you have to increase your credit score. Here are some great ways that you can go about improving your score:

• Limit the number of new accounts that you’re signing up for
• Don’t skip any payments, even if you can only pay the minimum
• Pay your revolving credit account bills in full each period
• Pay off old accounts as quickly as possible

By practicing good financial habits, you’ll be able to improve your credit score and get better mortgage offers. However, you should keep in mind that credit history stays on your account for seven years. So, it may take a while to get your score to where you want it if you haven’t been following good habits.

Correct Your Credit Report

That brings us to the second point: you have to look at your credit report and make changes when necessary. Otherwise, your credit score is going to change without your knowledge.

To look at your credit report, you can use Equifax, Experian, or TransUnion. If you spread out when you’re asking for these reports, you can see your credit report for free every four months. This will help you keep an eye on your report throughout the year.

Lower Your Debt-to-Income Ratio

Your debt-to-income ratio tells lenders what percentage of your income is taken up by the debt that you currently have. If your debt-to-income ratio is too high, it tells potential lenders that you don’t have enough money to cover your expenses.

So, that lets them know that you’re putting so much money on your credit cards and other lines of credit that you can’t pay it off with your current income.

No lender wants to give money to someone who can’t pay off their current debts.

To combat this, you need to pay off as much of your debt as possible. You need to start setting money aside to pay off your existing lines of credit. This will improve your credit score and show credit companies that you can handle a loan on top of your current payments.

Increase Your Down Payment

A great way to convince a lender to give you a loan is by offering a big down payment. The larger the down payment, the more likely it is that a lender will give you a loan.

Your LLC mortgage down payment needs to be at least 20%. If you can offer more, that’s even better.

A larger down payment will also lower your mortgage loan amount as well as your total interest amount. So, it’s better to pay more upfront. It benefits you financially while showing lenders that you’re serious about your loan.

If you’re unsure how to offer a large down payment, you need to start by saving up the money that you need for a 20% down payment. But, you have to know the budget range that you’re using for your mortgage loan.

Use that range to calculate 20% of the upper range of your budget. Then, create a financial plan to save up that amount of money to put towards the loan that you want.

6. Partner With a Portfolio Lender

If you’re planning on buying a property as an LLC, you need to start thinking like a real estate investor. You’re not buying a property as an individual anymore. So, you need to think beyond conventional mortgage loans.

One of the most beneficial options is a portfolio loan.

Portfolio loans are kept in-house. The lender uses the loan to add more to their own portfolio. 

Typically, lenders would sell the mortgages on the open market. 

Portfolio loans are beneficial for multiple reasons:

• They don’t report your credit
• They don’t put restrictions on the number of mortgage loans you can have at one time
• They’re more flexible in terms of property type
• They’re more accommodating to individual wants and needs
• They may allow you to borrow all or some of the down payment
• They close faster than traditional mortgage loans

The only potential downside is that portfolio loans may be more expensive than your typical, conventional mortgage loan. However, you can lower the price of your loan by shopping around to individual lenders.

After scoping out your options, you can choose the best mortgage loan for your needs and wants. But, some consumers find the higher portfolio loan costs worth the greater flexibility.

7. Keep Extra Cash on the Side

Many consumers drop all of their money on a down payment. They’d rather pay more on the down payment and save on their total interest payment.

However, this isn’t the best strategy.

You have to think about all of the costs of buying a home. There’s more than the down payment.

Things like closing costs and administrative fees are commonly paid with cash like down payments are. So, you need to set aside extra money to handle these kinds of payments. Otherwise, you’re not going to be able to close on the mortgage loan for the house that you want.

Most mortgage loans come with fees that cost 2% to 5% of the total loan amount. And, this doesn’t include junk fees, including administrative fees, processing fees, and other fees that you’ll run into.

After those, you’ll have title fees, settlement fees, insurance premiums, property taxes, closing costs, and more.

Make sure that you’re setting aside a large chunk of change to take care of these costs. Otherwise, you’re going to be left penniless after getting your mortgage loan.

8. Learn About the Consequences of Defaulting

No one wants to default on a loan. No one plans on it.

Yet, it still happens.

One of the main concerns for LLCs is whether or not the lender can come after the owner personally after they default on a loan.

Unfortunately, the answer is yes (in most cases).

Most lenders for LLC mortgage loans will require you to sign an LLC mortgage personal guarantee. This document says that you’re personally liable for the payments on the loan even though the LLC is the entity signing the loan documents.

In other words, the lender wants to be able to track down a physical person rather than an abstract business. So, your personal assets are not protected.

Even worse, defaulting could result in the lender coming after your personal belongings, including your home and your car. They may even try to take some of your wages.

It’s not pretty.

So, you need to avoid defaulting. Your business depends on it, but you depend on it, too.

9. Avoid Transferring Ownership

Transfer of mortgage ownership is a common trick that property owners try to do. Commonly, real estate investors try to transfer ownership so that they can take advantage of the benefits of getting an LLC mortgage.

These investors buy a property under their personal name and take out a conventional mortgage under that name for that property. Afterward, they transfer the property title to their single-member LLC. This is supposed to provide liability protection.

However, this transfer could violate your mortgage loan agreement. Most lenders have a “due on sale” clause. Since the investor technically sold the property to the LLC, this counts.

If you’re caught trying to transfer ownership, you could have to pay back the loan in full immediately. 

Some business owners try to risk it and hope that they don’t get caught. But, many business owners don’t think that the risk is worth it.

We agree.

The possibility that you’re caught is much greater than the potential advantages of the transfer. So, you should avoid this trick, no matter how many business friends have pulled it off.

10. Try Again If You Don’t Get Approved

If you don’t get approved for your first choice in mortgage loans, you can try applying for a non-comforming loan. These kinds of mortgages are not the conventional loans that you may be used to.

They have a greater availability of mortgage loans for those with less desirable credit histories. However, some of these loans come with higher consumer costs.

More specifically, non-conforming loans tend to have higher interest rates. So, you’ll be paying more money over time as that higher interest rate charges you for the money that you’re borrowing.

Depending on your financial goals, the higher interest rate may be worth getting the property you want sooner. However, many people would rather spend a few months or years getting their financial issues worked out.

If you’re running on limited time, you should opt for higher interest choices. If you’ve got time, you should try to better your credit score and improve your financial health before getting an LLC mortgage.

Alternatively, you could pursue a personal loan. If you don’t need a very large mortgage loan, a personal loan could give you all the funds that you need to cover your home purchase. However, LLCs buying more expensive properties won’t be able to cover their purchase with a personal loan.

In that case, you could try to apply for a home equity loan or home equity line of credit.

There are plenty of options to choose from. You aren’t stuck without options if you don’t get approved on your first try.

Get Started With the Best LLC Mortgage Lenders

If you’re ready to start working with the best LLC mortgage lenders in New York City, Aurum & Sharpe is here for you. We can help you get the best mortgage terms for you.

With our 29 years of combined experience, we can guide you through the process of getting a mortgage loan. And, we can help you through the big financial decisions you’re going to need to take.

Get in touch with us today to get started!

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