When it comes to your personal finances and the dream of owning a home, getting a small business loan might seem like it shouldn't matter. In theory, they're separate things—one for your business and the other relates to your personal credit. However, for some burgeoning entrepreneurs, complications arise when their business and personal finances intertwine. That's when the question of whether a business loan affects getting a mortgage becomes more complicated.
In this article, we'll delve into specific situations in which your current SBA or business loan may impact your ability to get a mortgage, explaining the questions lenders seek to answer. In turn, you can take steps to wall off your personal credit from your business finances, making yourself a more attractive candidate for home loans.
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Scenarios In Which Business Loans May Impact Your Mortgage Eligibility and Rates
Good news—most businesses are structured in a way that establishes a hard division between the owner’s personal finances and those of the company’s, achieved through an LLC, C-Corp, or S-Corp. This means that the business’s loans and overall financial fitness shouldn’t impact your ability to apply for a home mortgage. However, there are exceptions.
Below are scenarios in which a business loan and other kinds of debt could directly (or indirectly) impact your ability to receive favorable mortgage terms:
- If you are a sole proprietor - As a sole proprietor (without an LLC), you and your business are considered one entity, causing lenders to view your personal and business finances as one and the same. They will observe whether loan payments were historically made on time and factor the business loan into the overall debt-to-income (DTI) ratio; if this measurement is higher than 45%, you may struggle to secure a mortgage for a reasonable rate.
- If you are a general partner - General partners are personally accountable for business debts. If the business encounters financial issues or defaults on a loan, it directly affects your personal finances. Lenders may be cautious about extending a home loan to someone with potential personal liabilities tied to a business partnership.
- If you personally guaranteed a business loan - If you've personally guaranteed a business loan, you bear direct responsibility for its repayment. This arrangement is not uncommon, especially for startups lacking substantial assets or an extensive financial history. Consequently, any challenges the business faces in meeting loan obligations may have repercussions on your personal credit. Mortgage lenders evaluating your application may take this additional financial liability into account, potentially influencing your eligibility and rates.
- If you have a less-than-stellar repayment history for a business credit card - Like loans, credit cards are a way to borrow funds and can contribute to mounting debt if left unchecked. If you’re the primary holder of a business credit card, late payments will impact your personal credit score in most scenarios. This, in most cases, affects how mortgage lenders perceive and evaluate your loan application.
- You own (or have substantial stake in) a company reporting losses - If you own a stake in a business reporting losses, it can raise concerns for mortgage lenders who may question the impact on your personal finances. For this (and many other reasons), choosing a business loan that aligns with your company’s needs and offers favorable repayment terms is crucial.
Consulting with the knowledgeable business financing experts at Bank of Hope can help you determine which loan type best sets you up for future success.
- You recently had a hard credit inquiry for the sake of your business loan - A recent credit pull indicates recent inquiries into your credit history. Lenders often interpret multiple credit inquiries within a short period as a sign of financial instability or potential debt accumulation. It can also impact your credit score for up to five points. For this reason, it’s ideal to wait a year between your business loan and mortgage application, though your credit score may bounce back within only a few months.
Did You Know Your Personal Credit Score Can Impact Getting a Business Loan?
After discussing how existing business loans and debts can sometimes affect your chances of getting a mortgage, it’s worth acknowledging that the reverse can also be true: your personal credit history plays a role in determining your eligibility for a business loan.
Lenders want to work with candidates who have established track records of fiscal responsibility and will look at your individual credit score as an indicator. Different lenders have different rules, but generally, if your personal credit score is below 680, securing a loan from traditional lenders such as banks can be challenging, as they typically prefer scores above 700. The Small Business Administration (SBA) might consider a score of 650 acceptable, provided other aspects of your business are strong.
In short, a mortgage can be a fantastic tool for reinforcing your personal credit score, provided you keep up with owed monthly installments. On the other hand, failure to meet payment deadlines can harm business loan lenders' perception of your financial savvy.
Other ways to raise your personal credit score:
- Pay Bills on Time - Timely payment of credit card bills, loans, and other obligations is crucial for maintaining a positive credit history. Setting up auto-pay can help you stay on top of regular bills.
- Establish an Emergency Fund - Having an emergency fund can prevent you from relying heavily on credit during unexpected financial situations, contributing to a healthier overall financial picture.
- Lengthen Credit History - Keep older accounts open, as a longer credit history can contribute positively to your credit score. Avoid closing old accounts, especially those in good standing.
- Be Selective About Co-signing Loans for Others - Be selective about co-signing loans, as doing so means you share responsibility for the debt, and any missed payments could impact both your credit scores.
For more guidance on acquiring business loans, read our guide to Express SBA loans or visit pages for EZ Loans, SBA loans, and general business lending.
Steps You Can Take to Distinguish Your Personal Credit From Your Business
The best way to ensure business loans and other debts don’t impact your chances of getting a mortgage is to compartmentalize personal and business finances through the establishment of an LLC, C-Corp or S-Corp. This requires taking measures against commingling funds, including establishing separate bank accounts and credit cards, and handling bills and purchases separately.
Additionally, we recommend owners pay themselves a salary, meaning the regular transfer of consistent amounts between their business bank account and their personal account. In turn, their business bank account should not be used for any non-company expenses and vice versa. For more guidance, read this article from the U.S. Small Business Administration.
Ready to Apply for a Mortgage? Eager to Learn More?
Bank of Hope's Mortgage Banking Division stands ready to support you in securing the ideal mortgage, whether you're in the process of buying a new home or refinancing your current one. Our highly-experienced team can review your unique financial circ*mstances and provide insights into the ever-changing mortgage market to recommend a lending plan that best fits your family.
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For additional insights into the complexities of qualifying for home mortgages and the application process, check out:
- Getting a New Mortgage Before Selling a House
- Tips for Estimating a House's Worth in 5 or 10 Years
