If you own a business and have a loan for it, and you are planning on buying a home, you might be wondering if the business loan will affect whether or not you can get a mortgage. A business loan can impact your credit score if you are the sole proprietor of the business and take out the business loan in your name instead of the business’ name, or if you personally guarantee the loan. A lender will be looking to see if you and your credit are stable when they decide to give someone a mortgage loan.
How Business Loans Affect Your Credit
While a business loan that is in the name of the business is not typically figured into the math when a mortgage lender makes its decision, there are some situations where it can impact your credit. If you are the sole proprietor of the business, your business loans will have a more significant impact on your personal credit.
One way they can impact your credit score is if you have to personally guarantee your business loan. This is because if the business does not make payments on the loan, you personally are responsible for making the loan payments. In this instance, you are the co-signer of the loan, so the debt can show up in your credit report.
If you use business credit cards to help fund your business, these can also impact your credit score, especially if you are the sole proprietor of the business; this means your personal credit can be the same as your business credit. Any payments you make for your business loans and credit cards can help build up your personal credit, but missing payments will hurt it too. And the business debts held in your personal name will be counted against you in your debt ratio when applying for a mortgage.
If you use your personal credit cards for your business expenses, that will impact your credit score because it is in your name, which is why having a business name and taking out the card under the business name is important.
Some people work for a business as an employee on a salary, and use their personal credit cards for business expenses, then get reimbursed for the charges later. However, even if you get that money back later, you are still running up large balances on your personal credit cards now, which can greatly impact your personal credit score and debt to income ratio, both of which are important when buying a house. If you do this, you should consider speaking to your employer about getting a credit card in the business’ name so that your business expenses will not impact your credit score and your debt ratios.
To keep your business and personal credit scores separate, you can make your business an LLC or a C or S Corporation. That will ensure the two are not intertwined and should not hurt your personal credit, making it easier to get a mortgage loan. However, you also must take out any type of credit under the business’ name to keep it separate from your credit so it cannot impact things like your mortgage.
Types of Credit Inquiries
When a company looks up your credit, they may do so in two different ways, one of which can impact your credit. The first is a soft pull, which does not hurt your credit score in any way; this is the type used when you request a credit report from a company. The other is called a hard pull, and it can impact your credit score.
A hard pull is usually triggered by bigger things like a mortgage application, a car loan application, student loan inquiries, and something like a business loan inquiry may also do it. Every time a company does a hard pull of your credit, it gets noted in the report, and if there are a lot of hard pulls in too short of a time period, it can impact your mortgage loan. Every hard pull will ding your credit by a few points. While this might not get you denied, you may end up with slightly less favorable terms.
The one saving grace with a hard pull is that FICO grants everyone a 30-day grace period before inquiries like mortgage and auto loans will be reflected in your credit score. This means that you will not be racking up too many hard pulls when searching for a favorable home or auto loan. FICO will also usually record multiple inquiries for the same loan type as one inquiry if it is within a 14-day window.
How to Get a Mortgage with a Business Loan
There are a few things you can do to make it easier for you to get a favorable mortgage loan when you have a loan for your business.
Avoid Hard Pulls
If you know you will be applying for a mortgage within a few years, take some time to prepare. Avoid applying for anything that will require a hard pull, at least, as much as you can. A hard pull will stay on your credit report for two years, though they typically will only impact your credit score for one year. Depending on your overall credit history, your lender may or may not take a hard pull that is no longer affecting your credit score into account. If you are applying for a business loan, for example, early in those two years, having multiple hard pulls from that will only hurt your credit score once. However, if a business loan is not critical to keeping the business growing or running, try to get it until after you have secured a mortgage loan so that its impact on your credit will not hurt your chances of getting a mortgage.
There are some other business financing options that you can look into that do not require a hard pull for your credit. Invoice financing is an option that allows you to get an advance on an invoice from one of your suppliers without waiting for them to pay it. This kind of financing usually has a fee of two to five percent. There are also merchant cash advances, which are not quite loans. They are a cash advance on the credit card transactions for your business based on data from the last year. These can help you get financing without having a hard pull on your credit.
Pay Your Credit Cards Off
Before looking for a mortgage, work on reducing your personal debt as much as possible. Work on paying off your credit cards but keep the credit card accounts open. While it might make more sense to you to close the credit card accounts after paying them off, keeping them open will give you a longer credit history. In addition, paying the cards off will help improve your credit score, helping to balance out any hard pulls caused by your business loan. Try to pay down your credit card balance to below 30 percent of your overall credit limit to help improve your credit score.
Have Money Saved Up
When buying a home, having as much money saved up as possible is a good idea. There are a lot of different loan programs out there that will allow for a lower down payment that is anywhere from three percent down for first time home buyers to as much as 20 percent down. But there are a lot of different variables and requirements based on loan size and property type, and the location of the property you want to buy that will impact that. You can even get a loan with no money down if you are a veteran.
Even if you are using a loan program that lets you buy with a low down payment, you still need closing costs and money for any emergencies that come up. You do not want to completely drain your savings on the down payment and closing costs.
As you can see, getting a mortgage is a complex process, so it is always good to talk to a mortgage loan officer. Contact Brian Martucci to discuss your scenario in more detail.