How the partners in your real estate LLC decide your loan…
We had a client come in recently with a low credit score and HIGH quoted interest rate for a DSCR loan refinance.
After offering a simple usage loan to bring his credit score back up… He dropped this bombshell on us about his LLC partners (don’t make the same mistake).
DSCR Loans and a Real Estate LLC
This client told us he owned the property. All the properties were his. Then we got to ordering the title…
And the property was under an LLC. No problem! DSCR loans are great with LLCs.
Then he mentioned that he has a partner. And the partner owns 40% of the LLC. And his partner’s credit score was even worse than his.
Depending on the lender, a partner has to own a certain percentage of the LLC before their credit score matters. For some, it’s a minimum of 5% ownership. For others, it’s 50%.
In this case, at 40%, we look at the lowest credit score in the LLC to determine the loan rate and LTV.
Be warned: if your financing is under an LLC, you can get quoted one set of terms, but once it comes down to it, your partners’ credit scores can make the actual terms worse. Don’t let this catch you off guard.
You should not only be careful with your own credit – but with the credit of everyone in the LLC.
How to Fix a Real Estate LLC’s Member’s Bad Credit
In this client’s situation, we’re going to try another solution, but it will take much more time.
We’re going to move this partner off the LLC while we do the usage loan. Then give it a month or two until the lender can see that it’s only the client’s name, with no partner.
There are hurdles this way. But there are always ways to get through it.
Keep this in mind when you put LLCs together for real estate investing. You might want one person with great credit and one with great experience, but however you piece it together, make sure you’re upfront with your lender. Being open about the LLC at the beginning can prevent roadblocks down the road.
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