Will a Business Loan Affect Getting a Mortgage Approval? [Expert Answer]


This following post answers the question: Will a Business Loan Affect Getting a Mortgage Approval?

Many small business owners need to take out a business loan to keep their business running.

If you’re in the process of getting your mortgage, however, you may be worried that this can negatively affect your approval chances, or worse, prevent you from being approved at all.

The good news is that getting approved for a mortgage and taking out a business loan are very different, and lenders rarely consider one when assessing the other.

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But don’t just take our word for it; here’s what you need to know about how a business loan can affect your mortgage approval.

Will a Business Loan Affect Getting a Mortgage Approval?

The best answer is, it depends. Some lenders will factor in your business loan when considering your application for a mortgage, while others won’t. Your business loan could negatively affect your chances of getting a mortgage if you have existing debts.

However, if you have several years of stable finances behind you, a home equity line of credit (HELOC) or business loan won’t likely affect your chances of being approved for a mortgage.

If there are potential issues with getting approved for your home purchase because of other debts, most banks can offer an option called debt consolidation, which would lump all outstanding debts into one new payment over time to make repaying them more manageable.

How Business Loans Affect Your Credit

Credit is still a very important factor when applying for any loan, including business loans. With that said, having credit issues can still hurt your chances of getting approved and affect your interest rate.

Your lender will want to ensure that you have good credit standing before they agree to lend you money; in most cases, it’s better to be slightly over-qualified than barely qualified when applying for anything.

When it comes down to it, lenders are going to look at all aspects of your financial life—including your spending habits—before agreeing to lend you money.

They want to make sure that you have put yourself in a situation where you can responsibly handle more debt and increase your risk potential.

Business Structure

When deciding how to structure your business, keep in mind that it will affect your personal mortgage application.

As a general rule, business-related debt will be included in your total debt-to-income ratio, but personal loans and credit cards (not for business purposes) will not.

If you have more than one business account open, make sure that none of them are considered personal debts if you plan on buying a home soon.

If you’re still interested in starting up multiple businesses and taking out loans for each of them, just make sure you get everything set up before applying for your loan.

Getting things organized now can help avoid headaches down the road.

Personal Guarantee

However, be aware that cosigning for your business loan is essentially putting your own personal credit on the line—and any credit issues you have at that time will affect your ability to get approved for a mortgage.

In other words, don’t do it if you’re in danger of being denied because of too many inquiries or delinquent accounts.

If things go well and you pay off your business loan quickly, you’ll help boost your credit score and make yourself more appealing to lenders; if things don’t go well, your mortgage loan won’t get approved and then you’ll have even more problems on your hands.

Business Credit History

Your business credit history is comprised of two different components, according to Experian. First, there’s your personal credit history (including your personal credit accounts and debt).

Then there’s your business credit history, which takes into account any debt you may have accrued for your business (business loans, commercial credit lines, or unpaid invoices).

Although these two histories may seem separate at first glance, they’re actually entwined. In order to get approved for a mortgage loan with a lender like Wells Fargo, both aspects of your personal and business financial history need to look positive.

How to Get a Mortgage with a Business Loan

For most entrepreneurs, opening a business requires a loan. If you have recently taken out a loan to fund your business, you might be wondering how your new debt will affect your ability to get a mortgage.

Will lenders see you as riskier than they would have previously?

Is it worth even trying to get a mortgage after taking out a business loan?

The good news is that there are lenders who aren’t put off by debt and want to help entrepreneurs like you purchase your home.

Avoid Hard Pulls

If you will be applying for a mortgage within the next few years, be mindful and spend some time preparing. Avoid hard-pulling yourself when possible, at least as much as you can.

A hard credit inquiry stays on your credit report for two years, but it typically will only affect your credit score for one year. It’s up to your lender to decide if they’ll consider a hard credit inquiry, regardless of whether or not it is currently affecting your credit score.

So for example, if you are applying for a business loan in the first two years of opening a business, it will only count as one hard pull from your credit.

However, if it is not critical to running the business, try to get it as soon as possible after you get your mortgage so that it won’t be so detrimental to your credit score and make it more difficult to obtain a mortgage.

Have Money Saved Up

Considering getting a loan with as low a down payment as possible is a good idea when buying a home.

For example, if you are a first time home buyer, you may qualify for a three percent down payment.

Or, if you have more money saved up, you can consider a higher down payment and in some cases may even qualify for one with up to 20 percent.

The required information can vary by loan size, the type of property, and the region in which the property is located. You can even get a loan with no money down if you are a veteran.

Even if you’re using a program with a low down payment, you still need money for emergencies and for closing costs.

The final cost for the down payment and for the closing process are enough to deplete all of your savings.

Pay Your Credit Cards Off

Before securing a mortgage, as much as possible reduce your personal debt – focus on eliminating credit card balances, but do not close the credit card accounts.

Although you might be inclined to close the credit card accounts once you’ve paid them off, it would be wiser to keep them open as they will increase your credit history and if you pay them off it will make a positive impact on your credit score.

It would be in your best interest to get your credit card balance below 30% of your credit limit in order to help your credit score.

Ways to Separate Your Personal and Business Finances

Setting up a personal and business financial barrier will help you protect your personal assets and credit rating. Here are some simple options to set up that barrier

  • You will need to establish an official company website and email address.
  • Set up a new bank account.
  • Make use of business credit cards.
  • Don’t use your personal account to set up utility and other accounts; instead, use your business name.
  • Fill out an application and sign the document in the business’s name.
  • You should never make purchases or pay bills with your personal account.
  • Rather than a sole proprietorship, consider setting up your business as an LLC or corporation.

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