Closing Under an LLC? Don’t Forget these Important Documents!
Securing a mortgage loan under an LLC brings many advantages. But while most people understand how to obtain a personal mortgage loan, few borrowers know the process for an LLC.
The process, while similar, is slightly different, but it all starts with having the right documents…
Closing Under an LLC? Why it’s a Popular Choice
Let’s take a step back and discuss why securing a loan under an LLC is so beneficial in the first place. When you have assets under an LLC, they are legally separated from your personal property. Although you own the LLC, the LLC, a legal entity, owns property and equipment and has nothing to do with your personal home, bank account, or vehicles. This might seem like an arbitrary separation until you get sued.
If you have a rental property under an LLC and someone injures themselves at the residence, they can sue the business entity for damages and seize the LLC’s property. However, they cannot seize your personal assets, or at least would have a hard time doing so. Your home, personal savings, and other valuables are not at jeopardy. Likewise, if someone sues you personally, they cannot go after your business assets, protecting your future source of income.
Securing the loan under an LLC increases privacy, gives you pass-through tax status, and helps keep your business assets and costs separated from personal holdings, a key step in business organization. For this reason, numerous investors prefer to have all their properties listed under an LLC, which starts with securing a loan under the business entity. This means you need proper documentation.
Documents You’ll Need When Closing a Loan Under an LLC
Proof of Business Activity and Profits
Your lender will need to see a variety of information, and while you can secure a loan without income documentation, using four to six months (or more if possible) of bank statements will give the lender a clear idea of your overall business health and strength. Remember, you are filing the loan under your LLC, so these statements should come from bank accounts owned by the business, not by you directly. Your lender may eventually request documentation on personal assets in special situations, but usually the LLC’s information is all you need.
Credit Information on LLC
Similar to a person, an LLC will have a credit profile if it has dealt with loans and made payments, and this credit profile can either help or hinder your chances of securing a loan. With personal credit, the bureaus are required to give free access to your reports, but there is no such requirement for business credit, so you may have to pay a fee to pull this information. Before applying, you may want to review your LLC’s credit profile. If the LLC has credit cards or loans on vehicles or equipment, it likely has a profile with the major bureaus.
When you take out a mortgage, you rarely have to show that you own personal assets that can be used to support the payments in the event of an emergency, but business loans, because of the slightly greater risk to lenders, can be different. Depending on the situation, you may need to bring documentation of assets owned by the LLC. This can include expensive equipment, other forms of real estate, or even bank accounts. Documents such as deeds, investment statements, and titles to equipment may not be needed, but they could increase your chances of a successful application.
Written Business Plan
For obvious reasons, the lender wants to know that you have a good business plan. Before writing a loan, lenders like to see that the owner of the LLC is well organized, has a clear plan, and a steady, reliable source of income. Lenders are certainly not experts in your business, but a basic business plan shows foresight, coordination, and focus, all of which are important to a business’s success.
Market Survey Information
When securing a loan for a rental property, a major part of the process will be a market survey. This market survey essentially tells us how much income the property will generate on an average monthly basis, taking to account the area, the house, the demand for housing, and times when the property is unoccupied.
The market survey is especially important for renters seeking a no-income loan, as it will play a key role in how the loan is qualified. The total amount of future rent can impact qualification, interest rates, and other terms.
Similar to documenting assets, you may also need to provide documentation of financial reserves. Essentially, this will simply mean bringing statements of total savings in bank accounts or other areas that can be used to pay the mortgage in the event of an emergency. It is best if these accounts are legally held by the LLC.
Cash reserves are usually summed up in total months of mortgage payments, and you will usually need at least six months in reserve. So if you will have a mortgage payment of $2,000, and the requirements are for six months, you would need to display at least $12,000 in total reserves. (This can vary, so talk with a lender for specifics on reserve requirements.)
Verification of LLC Ownership
This might seem redundant and unnecessary, but you’ll need to prove to the lender that you actually own the LLC in question. These documents are easy to obtain, but some borrowers take it for granted and visit the lender with no proof that they actually own the business, which complicates or at least delays the lending process.
Verification of ownership can usually be done through copies of voided business checks, tax information, or any document that connects your name to the business itself.
Work with a Team That Can Secure Your LLC Loan
If you are interested in a top-quality loan for your LLC, bring your documents to the team at San Diego Purchase Loans. We take a common-sense approach to lending, increasing your chances of securing the financing you need for your next investment purchase.