Can an LLC Take Out a Mortgage? Avoid This Pitfall + FAQs

Confused about whether an LLC can take out a mortgage? You’re not alone. According to Harvard University’s Joint Center for Housing Studies, nearly 75% of small rental properties are owned by individuals rather than LLCs, often because owners worry an LLC can’t easily get financing – potentially putting personal assets at risk.

Yes – An LLC Can Take Out a Mortgage (Direct Answer)

Yes. In the U.S., a limited liability company (LLC) can legally take out a mortgage to buy real estate. Lenders treat an LLC as a separate business borrower. This means the loan is in the LLC’s name rather than an individual’s. Many real estate investors and businesses use LLCs to purchase property – for example, buying an office building or rental home under an LLC. It’s a common practice to protect personal assets via the LLC’s liability shield.

However, getting a mortgage through an LLC is more complex than a regular home loan. Most traditional mortgage lenders won’t lend directly to an LLC. Instead, LLCs often must seek commercial or “investment” mortgages from specialty or local banks. These loans typically come with stricter terms – such as higher interest rates, larger down payments, and sometimes shorter repayment periods. In addition, most lenders require the LLC’s owners to personally guarantee the loan. In practice, this means if the LLC fails to pay, the individuals are still on the hook. So, while an LLC can take out a mortgage, the process requires extra steps and comes with trade-offs. The key is understanding those conditions upfront, which we’ll break down next.

Key Terms: Understanding LLCs and Mortgages

To navigate this topic, it helps to clarify a few key terms:

• Limited Liability Company (LLC) – A business entity structure providing owners (called members) with personal liability protection. The LLC can own property, incur debt, and be sued or sue in its own name. It shields personal assets from business liabilities (unless owners personally guarantee a debt).
• Mortgage – A loan to purchase real estate, where the property itself serves as collateral. If the borrower doesn’t repay, the lender can foreclose (take the property). In context, a traditional mortgage usually refers to a home loan to an individual, while an LLC mortgage refers to a loan where the LLC is the borrower.
• LLC Mortgage – Not a special type of loan, but a term describing any mortgage taken out under an LLC’s name. These are often structured as commercial loans (meant for businesses or investment properties) rather than standard home loans. They might be offered by commercial divisions of banks or specialized lenders.
• Personal Guarantee – A legal promise by an individual to repay a loan if the business (LLC) cannot. Lenders typically require personal guarantees from LLC owners. This makes the owner personally liable for the debt, bypassing the LLC’s liability protection for that loan. Essentially, the lender gets an extra layer of security – they can pursue the individual’s personal assets if the LLC defaults.
• Conventional Loan – A common type of residential mortgage often backed by Fannie Mae or Freddie Mac. These require individual borrowers (or sometimes a living trust) and offer long terms (30-year fixed) with low rates. Conventional loans are generally not available to LLCs – a crucial point for anyone hoping to use an LLC for a property purchase.
• Commercial/Portfolio Loan – A mortgage from a bank or lender’s own portfolio, not sold on the secondary market. These are often used for LLC borrowing. Terms vary: interest rates are usually higher, down payments larger (often 25%+), and loan duration might be 15-25 years or have a balloon payment. They may consider the property’s income (for investment properties) as a key factor.

Understanding these terms sets the stage. In short, an LLC mortgage is possible but usually comes as a commercial loan, with owners signing personal guarantees since conventional mortgages won’t directly lend to an LLC. Next, let’s look at real examples to see how this works in practice.

Detailed Examples: Three Common LLC Mortgage Scenarios

To illustrate how LLC mortgages work, consider three typical scenarios that small business owners and investors face:

1. New Investor LLC with Personal Guarantee – Example: Jane forms an LLC to buy her first rental property. Her LLC is brand new with no financial history. She approaches a bank for a mortgage in the LLC’s name. The lender agrees only if Jane signs a personal guarantee and makes a 25% down payment. The loan offered is a commercial mortgage: a 15-year term at a higher interest rate than standard home loans. The mortgage is made to “123 Main Street LLC” rather than Jane personally. This gives Jane liability protection – if a tenant sues, her personal assets are safer. But because of the personal guarantee, if the LLC fails to pay the loan, Jane is personally responsible for the balance. The debt won’t show on Jane’s personal credit report initially, but the guarantee means any default could still hurt her personally. She accepts the terms, understanding that as a new LLC owner, she must trade some personal risk for the benefit of property ownership under the LLC.

2. Established LLC Buying Commercial Property – Example: XYZ Consulting LLC, a well-established business, wants to buy an office condo for its operations. The LLC has been in business 5 years and has solid revenues. It seeks a mortgage in the LLC’s name. A local community bank evaluates XYZ LLC’s financial statements, credit history, and the property’s income potential. Thanks to the company’s track record, the bank offers a 10-year commercial mortgage to the LLC. They still require personal guarantees from the two partners who own the LLC (each 50%). However, because XYZ LLC has good business credit and assets, the loan terms are a bit more favorable: a slightly lower rate and 20% down. The loan is made to the LLC, keeping the debt off the owners’ personal credit reports. If the LLC defaults, the bank can foreclose on the office condo and also pursue the partners personally due to their guarantees. This scenario shows that an established LLC can secure financing on its own merits to some extent, but lenders still typically insist the owners stand behind the loan.

3. Personal Mortgage Then Transfer to LLC – Example: Mike buys a rental duplex in his own name with a conventional 30-year mortgage (because it had a low 4% interest rate). After closing, he wants the asset under an LLC for liability protection. He forms “Duplex Holdings LLC” and transfers the property’s title from himself to his LLC. However, this transfer violates the mortgage’s terms (most home loans have a “due-on-sale” clause preventing transfer without lender permission). Mike didn’t inform his bank. The bank could demand immediate full repayment because the property changed ownership to the LLC. To avoid problems, Mike keeps making payments and ensures he has proper insurance naming the LLC. He essentially took out the mortgage personally, then moved the property to the LLC for asset protection. This is a common workaround since the LLC couldn’t get that low-rate loan directly. But it carries risk: if the lender discovers the transfer, they could call the loan due. Mike mitigates risk by maintaining good standing with the lender and having a strong insurance policy. This scenario is a cautionary tale – while it’s possible to combine a personal mortgage with LLC ownership, it must be done carefully (and often against the loan’s rules).

Below is a breakdown comparing these three scenarios for LLC-related mortgages:

As shown above, Scenario 1 (new LLC) and Scenario 2 (established LLC) involve the LLC taking out the mortgage directly, with personal guarantees. Scenario 3 is different – it shows an owner using a personal mortgage to later achieve LLC ownership of the property. Each path has benefits and downsides. Next, we’ll look at legal and financial evidence that further explains why these differences exist.

Evidence and Legal Considerations

Legal Status of LLCs as Borrowers: Under U.S. law, an LLC is treated as a separate legal “person” that can own property and enter contracts. There’s no law prohibiting an LLC from obtaining a mortgage. In fact, businesses borrow money all the time. The key constraint is lender policy and risk management. Major mortgage programs (like those backed by Fannie Mae/Freddie Mac) only lend to individuals, not companies. For example, conventional loan guidelines explicitly restrict borrowers to natural persons or certain trusts. This is why you won’t find a 30-year fixed mortgage from a big bank in an LLC’s name – it’s not allowed in the standard rules. The LLC must instead seek a commercial loan product, which is governed by different rules.

Personal Guarantees as Standard Practice: Lenders view small LLCs without a long credit history as risky. To offset this risk, banks almost always require a personal guarantee from the LLC’s owners. In practice, if you own 20% or more of an LLC, a lender will ask you to sign personally on the debt. That is a common threshold (for instance, the U.S. Small Business Administration uses 20% ownership as a rule for requiring guarantees on its loans). By signing a personal guarantee, owners agree that if the LLC cannot pay, they will repay the loan from personal assets. This evidence is seen in virtually all small business lending – banks want recourse to real people. As a result, even though the mortgage is “in the LLC’s name,” the owners are co-signers in all but the rarest cases. Only very large, well-capitalized companies or special non-recourse loan arrangements escape this requirement.

Higher Costs and Requirements: Evidence from lending data shows LLC loans come with higher interest rates on average. Lenders price these loans higher because business loans are considered riskier (business default rates tend to be higher than those of personal home loans). It’s not uncommon for an LLC mortgage rate to be 1–2 percentage points above a comparable personal mortgage. Down payments are also higher – often 25–30% down is required for an investment property via LLC, whereas an individual might buy a home with 20% (or even less for personal residences). Loan fees and closing costs might be higher too, reflecting extra underwriting work (e.g. reviewing LLC documents, appraising an income property’s rent potential, etc.).

Due-On-Sale Clause (Legal Risk when Transferring): A critical legal point for scenario 3 (transfer to LLC) is the due-on-sale clause found in most mortgage contracts. Federal law (the Garn-St. Germain Act) allows lenders to enforce this clause if you transfer the property’s title to an LLC without permission. The only exceptions in the law apply to transfers like into a revocable living trust or between family members – transfers to an LLC are not protected. This means if a bank discovers a property was moved into an LLC, it has the right to demand the entire loan balance due immediately. Many small investors still take the chance (some banks may not act as long as payments are on time), but the legal risk is real. It’s evidence of how mortgages and LLCs can conflict: the legal protections for lenders can clash with an owner’s asset protection strategy.

In summary, the legal and financial evidence confirms: An LLC can borrow, but market rules channel most LLCs into pricier commercial loans with personal guarantees. And if you try to game the system by using a personal mortgage then switching to an LLC, legal clauses like due-on-sale come into play. Understanding these realities helps in weighing the next consideration – should you pursue an LLC mortgage or stick to a personal one? Below we compare the two approaches.

LLC Mortgage vs. Personal Mortgage: Key Differences

Choosing between taking a mortgage through an LLC or personally comes down to balancing liability protection versus cost and convenience. Here are the major differences:

• Borrower: With an LLC mortgage, the borrowing entity is the LLC (business entity). With a personal mortgage, the borrower is you as an individual. This affects how the loan is underwritten and reported.
• Liability: An LLC mortgage can shield your personal assets from liability related to the property debt – but only if there’s no personal guarantee (which is rare for small LLCs). In contrast, a personal mortgage directly ties your personal assets to the loan (you’re fully liable). Even with a personal guarantee on an LLC loan, having the property in the LLC can still protect you from non-loan liabilities (like lawsuits from tenants or visitors).
• Credit Impact: A loan in an LLC’s name typically doesn’t show on your personal credit report (unless you default or the lender reports the guarantee). This can help keep your personal debt-to-income ratio clean when seeking other credit. A personal mortgage, on the other hand, appears on your credit report and affects your credit score and borrowing capacity for other loans.
• Interest Rates: LLC mortgages usually have higher interest rates. Lenders charge more because they view business loans as higher risk. Personal home loans benefit from lower rates thanks to government backing and the assumption that people prioritize paying their home mortgage. Expect an LLC loan to cost a couple percentage points more in interest.
• Down Payment: Higher down payments are common for LLC loans. A 25% (or more) down payment is standard for an LLC borrowing for an investment property. For a personal mortgage on an investment property, 20% is common (and for an owner-occupied home, individuals can put as low as 3-5% with certain loan programs). The LLC won’t qualify for those low-down options.
• Loan Term and Type: Personal mortgages can be 30-year fixed-rate loans, providing long-term stability. LLC or commercial loans often have shorter terms (5, 10, or 20-year) or adjustable rates. There are some 30-year loans for LLCs (offered by niche lenders, sometimes called DSCR loans for rental properties), but they come at a higher rate. Generally, the financing flexibility and variety is greater with personal loans.
• Approval Process: Getting an LLC loan involves more paperwork and stricter scrutiny. Lenders will likely require the LLC’s formation documents, operating agreement, tax returns, bank statements, and an LLC resolution authorizing the borrowing. They also underwrite the owners (credit checks, income verification for guarantors). For a personal mortgage, it’s mostly your personal financial info and credit that matter. The process is more standardized.
• Availability of Lenders: Not all banks or mortgage companies offer loans to LLCs. Many big lenders simply say “no” to LLCs (for example, some well-known online lenders and mortgage brokers only do personal loans). You may have to find a commercial loan officer or a bank that specializes in real estate investment loans. In contrast, personal mortgages are widely available from many lenders.

These differences highlight that using an LLC to get a mortgage is usually harder and costlier, but it serves a strategic purpose (liability protection, separating business from personal matters). Many investors start with personal loans for cost reasons, then transition properties into LLCs or buy future properties via LLC when they can shoulder the tougher terms. There isn’t a one-size-fits-all answer – it depends on your priorities.

Things to Avoid When Seeking an LLC Mortgage

If you decide to have your LLC take out a mortgage, keep these cautionary points in mind. Avoiding these common mistakes will save you headaches and legal trouble:

• Avoid assuming any lender will accommodate an LLC. Most conventional mortgage lenders won’t lend to an LLC. Don’t waste time applying for a standard home loan in the LLC’s name. Instead, seek out commercial or portfolio lenders who advertise loans for LLCs or real estate investors.
• Avoid minimal down payments. Expect to put at least 25% down for an LLC property loan. Trying to get by with a small down payment will likely lead to rejection or unfavorable hard-money loans. Plan your cash accordingly.
• Avoid neglecting your personal credit. Even though the LLC is the borrower, your personal credit score still matters (for the guarantee). A mistake is thinking “It’s my LLC’s loan, so my credit isn’t relevant” – in reality, lenders will check your credit and financials. Keep your credit strong and reduce personal debt before applying, as you’d do for any mortgage.
• Avoid commingling funds or sloppy LLC records. To convince a lender (and to preserve your liability protection), you need to show the LLC is a legitimate separate entity. Keep a separate bank account for the LLC, maintain proper financial records, and have an operating agreement. Lenders may ask for LLC resolutions or meeting minutes authorizing the mortgage. Being prepared will smooth approval.
• Avoid thinking you’re off the hook personally. Nearly all small-business mortgages require personal guarantees. Do not assume that putting the property in an LLC means you can walk away from the loan obligation. If you default, the bank will come after you personally if you signed a guarantee. The LLC structure won’t shield you from the lender – it primarily shields you from other liabilities.
• Avoid transferring a mortgaged property to an LLC without advice. As discussed, don’t hastily quitclaim your personally-financed home to your LLC without consulting with your lender or an attorney. You risk triggering the due-on-sale clause. If you really need to transfer, talk to the lender; some might allow it with conditions, or consider refinancing into a proper LLC loan. Always ensure insurance and title are handled correctly when transferring.
• Avoid skimping on insurance coverage. Even with an LLC, you should carry robust insurance (property insurance, liability umbrella policies, etc.). The LLC reduces personal exposure, but lawsuits can still happen and the LLC needs protection. Lenders will require property insurance anyway; consider an umbrella liability policy as well since small LLCs can be pierced if you’re negligent.

Steering clear of these mistakes will help make your LLC mortgage experience much smoother and safer.

FAQs: LLCs and Mortgages (From Real Questions)

Can an LLC get a conventional mortgage?
No. Conventional home loans (the typical 30-year mortgages) are only given to individuals or qualifying trusts, not directly to LLCs.

Can an LLC obtain an FHA or VA loan?
No. Government-backed mortgages like FHA and VA are for individual owner-occupants. An LLC cannot take out an FHA/VA loan in its name.

Do I have to personally guarantee an LLC’s mortgage loan?
Yes. In almost all cases, lenders require at least one LLC owner (often every major owner) to sign a personal guarantee for the mortgage.

Will an LLC mortgage show up on my personal credit report?
No. If the loan is solely in the LLC’s name (with only a personal guarantee), it typically doesn’t appear on your credit report unless you default and the guarantee is invoked.

Are interest rates higher for mortgages in an LLC’s name?
Yes. Interest rates for LLC or commercial mortgages are usually higher (often 1–2% more) than standard home loan rates, reflecting the lender’s increased risk.

Do LLC mortgages require a larger down payment?
Yes. Expect to put more down – commonly 25% or more for an LLC property loan. Lenders require larger equity from business borrowers compared to personal home buyers.

Can I transfer my personally owned, mortgaged property into an LLC without issues?
No. Transferring a property with a mortgage into an LLC can trigger the loan’s due-on-sale clause. Always get lender approval before transferring; otherwise, you risk the loan being called due.

If my LLC has a mortgage on a property, can I still get a personal home loan (like FHA) for myself?
Yes. You can still qualify for a personal mortgage (e.g. FHA for a primary residence) separately. The LLC’s loan is under the business, so it won’t count directly as your personal debt, though you must disclose any personal guarantee obligations. Just ensure you meet income and credit requirements for the new loan.

By understanding these nuances, you can make informed decisions about using an LLC to finance property. An LLC can indeed take out a mortgage, but it comes with its own set of rules and hurdles. Armed with this knowledge, you can weigh the protection of an LLC against the costs and decide the best route for your real estate financing needs.