Can an LLC Get a Mortgage – Pro’s & Cons of Getting them for a Rental or Investment Property

Jason (P) David
Last Updated: May 17, 2021
Date Published: May 12, 2021

There are several benefits to forming an LLC for each rental property that you own.

They add an extra layer of liability protection between you as the owner and your business, which protects you personally should there be any legal troubles.

In fact, many real estate investors choose this method when setting up their rental properties and other real estate investments and here’s why.

Benefits of Using an LLC for a Mortgage

An LLC (limited liability company) is a business structure designed to protect business owners from being personally liable for the company’s debts or other liabilities.

The following are benefits for using an LLC for a Mortgage:

1. Asset Protection

LLC’s are simple, flexible and protect your personal assets.

If the business doesn’t do as well as planned or you have a rough year, you as the business owner are personally protected under an LLC.

For example, if your Limited Liability Company declares bankruptcy or is sued, your personal assets such as your vehicle, personal bank accounts, and house are safe.

This protects your personal liability and you are provided limited liability protection.

2. Tax Benefits

A Single member LLC is a pass-through entity, which means that profits and losses from the LLC are “passed through” to you and taxed as personal income.

This benefits you because you are not required to pay both corporate and personal taxes on your earnings.

For tax purposes, there are huge benefits for an llc owner.

Multi-member LLC’s are taxed as partnerships and are also pass-through entities.

This means each llc member pays personal income taxes on their portion of the profit.

3. Easy to Setup and Register

Unlike other business entity types LLCs are fairly easy to setup and can pretty much be done online.

The rules for setting up your LLC may vary slightly from state to state, but for the most part, you will be required to complete the following steps:

  • Select a Name for your LLC – you will need to check with your local Secretary of State to make sure the name is available and not already in use.
  • File the Articles of Organization – this is what officially registered your LLC and it includes your company name, address, and names and information of each LLC member(s).
  • Create an Operating Agreement – the operating agreement describes the role(s) of each member, ownership structure, and how profits will be shared or distributed.
  • Obtain Business Licenses and Permits – each State will have different licensing and permit requirements so you will want to see what is required for having a rental home in your city/state.

If you plan on applying for a mortgage under your LLC, lenders will want to see the above documents when you submit a mortgage application.

Checklist to Complete the setup of your LLC:

  1. Select a business entity type: Sole proprietor, LLC, Corporation, etc.
  2. Obtain an EIN (Employer Identification Number) from the IRS – once your online application is complete, you will receive an EIN instantly. You will need an EIN to open business bank accounts or apply for a mortgage under your LLC.
  3. Register your business locally in the State in which you will be conducting business. This is done with the either a Registered Agent or via the Secretary of State in the State in which you will be doing business.
  4. Obtain any business licenses or permits required in your State to operate a rental. These can also be found at your local Secretary of State website or by simply doing a Google search.

Can an LLC get a mortgage

What Documents do you need to Finance a Mortgage Under an LLC?

When you apply for a mortgage under an LLC, there are certain documents that the lender will want to review:

  • Articles of Organization and an Operating Agreement for your LLC, including information on all members or shareholders
  • Certificate of Good Standing from your Secretary of State’s office showing your LLC is in good standing, that all documents have been properly filed, and annual fees are paid in full
  • Employee Identification Number (EIN) showing that the IRS recognizes your LLC for federal tax purposes
  • Bank account information for the LLC, showing the history of deposits and withdrawals, current and average balance – you need an EIN to open a business bank account
  • Personal income, debt, and credit information on each member or shareholder of the LLC
  • Rental property history and information such as profit and loss statements, tenant lease, and payment history

How to Transfer an Existing Mortgage to an LLC

It is possible to transfer an existing mortgage to an LLC and it way this is done all depends on your assumption clause and lender.

The first think you want to do is review your “assumption clause” in your existing loan documents to see if you can transfer the loan to another party.

If you can’t seem to find this information, the lender can help you.

You can explain to your lender that you want to transfer an existing mortgage into a business entity that you own.

They can assign the mortgage to your LLC and have you complete the quitclaim deed that is used to transfer ownership from one party ot another without the actual sale of property.