Residential loans are often made to individuals and couples, helping them secure property to improve their lives and financial standing.
However, residential loans can also be made to business entities. These loans help businesses gain operational advantages, and can be the difference between the long term success or failure of a business.
With residential loans for businesses, it’s important to understand the various qualifying measures, as well as the different types of businesses. With this information, you can begin the process of qualifying your entity for a residential loan.
Residential Loans Made to Business Entities
The Legal Review
Before the residential loan for a business can occur, the bank or lender will need to conduct a legal review. The bank will require that the members and partners, and sometimes the shareholders, be guarantors on the loan. Certain leaders and owners in the organization may also be required to submit separate individual applications for specific approval. To qualify the loan, a guarantor’s personal credit and financial information will be considered. This can include credit scores, assets, liabilities, and more.
Also, the operating term for the organization must be longer than the specific term of the loan, and a business entity application will need to be filed, which will essentially operate as the ownership statement.
Outside of California, lenders will require additional information. It’s best to talk with a professional who can guide you through the complexities of filing documents for organizations formed outside of California.
Individual Credit Checks and Personal Guarantees
In many cases, there are two important factors for securing a loan to business entities. The first is a credit check into one or more members of the organization. Depending on the nature of the business, the division of ownership, and the roles of certain members, there will likely be credit requirements for certain people. In most cases, majority shareholders, managing members, and general partners will need to provide credit information that lenders will use to approve or reject a loan.
Another factor in securing a residential loan for business entities is the personal guarantee. While some businesses are designed to shield members from financial risk, a bank will often require a personal guarantee on the loan. This document helps banks and lenders reduce risk by increasing the chances of full financial recovery in the event of a default.
Different Businesses are Qualified Differently
When seeking approval for a residential loan made to a business entity, many of the variables will change depending on the type of business. Whether your business is a general partnership, limited partnership, corporation, or LLC, there will be different requirements that affect how you get approved.
In the business world, there are generally two types of partnerships: general and limited. All partnerships, regardless of type, are written agreements between two or more people, although they can sometimes involve entities like businesses and estates. The purpose of a partnership is to create and conduct business together, creating (hopefully) better results for everyone involved.
First, we will discuss the specifics of residential loans for general partnerships. In this situation, the general partners will carry the burden of liability for the entity, and qualification will require a complete credit package from the general partners or a single partner who will sign the personal guarantee documents.
Next on the list is limited partnerships. While these are similar to general partnerships, they have a few slight, but important differences. People or entities involved in limited partnerships are only responsible for their respective share or contributions to the total partnership. Here’s a very rough example: If a limited partnership defaults on a $1 million loan, and a specific partner is only responsible for a quarter of the partnership, this partner can only be held responsible for a quarter million dollars. (In many cases, the “general partner” can be held responsible for entire liability.)
Qualification for a residential loan to a limited partnership is dependent on a complete credit package from the partner or partners and possibly a qualified partner that will sign a personal guarantee on the loan. In most cases, the bank or lender will not require a personal repayment guarantee from any general partners because they are already liable to the company. However, limited partners will need to sign a personal guarantee for residential loans.
Organizations that are authorized by law and made of stockholders for the specific purpose of funding and operating a business are considered corporations. They are, in almost all cases, operated by representative management that is overseen by a board of directors. The corporation can issue shares of stock that represent a percentage of the business,and anyone who owns stock is considered a “stockholder.”
To qualify a corporation for a residential loan, a complete credit package will be needed. This credit package will need to include information on the majority owner or owners. A majority owner will also need to make a personal guarantee on the loan.
Limited Liability Company (LLC)
Often called an “LLC,” a limited liability company will combine the benefits of both a corporation and a partnership for the purposes of conducting business and securing loans. With an LLC, members are shielded from personal liability for debts and legal claims against the organization. This is similar to how shareholders are shielded in a corporation. However, the LLC is often taxed for state and federal income purposes in a way that reflects partnerships.
To qualify an LLC for a loan, the majority ownership members or managing member will need to provide credit information. There will also be a personal guarantee requirement for ownership members and managing members.
Quality Loans for Hard-Working Business
We would be proud to help increase your chances of success. Contact our team today to learn how San Diego Purchase Loans can work to get you approved for affordable residential loans, no matter what type of business you own.
You deserve a loan that can improve your overall operations, and with our common-sense approach to lending approval, we make the process easier and more convenient.
I was referred to Chad by my Realtor for a purchase of a new house. The experience with Chad and the team (I mainly worked with Juliann) was nothing short of outstanding. From start to finish there were always quick to respond and when needed, notify me of any new documentation that was required. There were very helpful explaining to me the pros and cons of different financing options as well as some other loan related issues, such as termite clearance outside the purchase contact and septic tank certification process. Overall, very knowledgeable and processional team. Loan preapproval was done in a single day and loan documents were ready for signing in 21 days, which was 9 days ahead of schedule. That never happened to me before.
“This is the second time that I have worked with Chad (home purchase & refinance). He has become my subject matter expert and someone I depend on for all finance needs related to our home and real estate investments. My favorite things about Chad are his depth of knowledge, responsiveness, honesty and the great service he provides. I have referred countless friends and family of mine to work with him for no other reason than I know that he will treat them well and equip them for the best possible outcome. Chad will add tremendous value to any real estate transaction that you have and I am grateful to have him as a resource.”
“I must say I was extremely impressed with the professionalism and quick response from Chad Baker & his entire team. I screened over 5 lenders before selecting the Baker Team & boy am I happy customer. It’s evident that customer service is a priority for these folks.”