Buying 2-4 unit mult-fam under LLC -what are the steps for funding - must it be comm?

Question

This will be our first purchase not in our personal names.  It will be purchased by our LLC.  I'm trying to understand the process for purchasing 2-4 doors under a llc and how it differs from buying 2-4 doors under our personal name.  For context:

It will be 2 - 4 doors in Texas / LLC est. 2021 / LLC has a DUNS # but no credit / LLC has checking & savings accounts with WellsFargo that are solely used for our very small (2door) rental business / we have an existing relationship with a mid-size credit union / our personal credit scores are both 800+ / very solid W2 income

I understand the process of getting pre-qualified, showing POFs when purchasing in our names but can someone please lay out the steps to being able to prove you have access to the funds when submitting your offer as a llc (please talk to me like I'm 5 :-))

Specifically for DSCR loans - I assume you must identify the property -> get the loan -> make the offer, is that correct?

Also, when buying under a llc is that automatically a commercial loan?  Even if the door count is less than 5?

Other than the "pre-qualification process" please feel free to share any other meaningful differences between these two types of transactions.

Thanks SO much in advance!

Joshua Davidson · Answer

If you buy a property under an LLC, it will have to be a commercial loan, forcing you to put down 20%+ if you weren't already planning on it. However, 4 units or less can be purchased with a residential mortgage. If you don't want to put 20% down, then definitely purchase the building using a residential mortgage. Since you are saying "our", I'm assuming you mean yourself and a significant other, in which case I would also recommend leaving the property in only one person's name. The reason is that you can have up to 10 properties in your personal name. If you each put your name on the property, it uses up one "slot" for each of you, whereas if you alternate properties you can have up to 20 combined (10 each).

If you are planning to do 20%, then you can just purchase with the LLC and do a commercial loan, though you will be limited to a 20 year loan term and amortization, whereas you can access 30 years under a residential loan. Overall investment is better over time with a 20 year loan, but immediate cash flow is better with the 30 year.

Happy to discuss what I know if you have any other questions. Shoot me a message, and good luck!

If you are planning to do 20%, then you can just purchase with the LLC and do a commercial loan, though you will be limited to a 20 year loan term and amortization, whereas you can access 30 years under a residential loan. Overall investment is better over time with a 20 year loan, but immediate cash flow is better with the 30 year.

Happy to discuss what I know if you have any other questions. Shoot me a message, and good luck!

Jerry Starr · Answer

Hello @Carissa Holmes,

We have a program that allows you to bypass the traditional lending requirements, eliminating the need for extensive paperwork and approval criteria. While the rates may not be as favorable as some of the options mentioned earlier, our focus is on cutting out all the red tape and providing a hassle-free experience.

Regarding DSCR loans, which typically involve evaluating rental income to ensure it can cover loan payments, it's important to note that we do not require DSCR on 1-4 unit properties. Our approach is strictly asset-based, meaning we primarily consider the value and potential of the property itself. While our rates may be slightly higher then some of the mentions above, the trade-off is a much smoother and streamlined process.

If you have any further questions or would like to discuss the financing options please don't hesitate to reach out. We're here to provide guidance and support throughout the process.

Dennis Muno · Answer

So, DSCR loans are not personal income qualifying, but rather asset income qualifying. DSCR lenders primarily look at the DSCR ratio of the home to qualify you, yes, with some credit considerations.

The DSCR ratio of a property= monthly rent/monthly PITI total(principal, interest, taxes, and insurance). Lenders usually lend over any ppt DSCR ratio 1 and above(of course subject to lender approval).

Answering your questions:

A proof of funds could be a bank statement, a verified letter from your lender.

You need to have the property under contract to purchase before the lender will begin lending process.Proof of funds is for the ability to make downpayment on at closing.

No, if you buy the property under an LLC it is not a commercial loan.Lender define commercial ppt as anything 5 and above units.Hence, commercial loans are for ppts usually 5 units and above.

Things to consider:

1. For a smooth DSCR purchase I'd recommend you start talking to a lender or mortgage broker as soon as possible and let them get you DSCR purchase loan pricing scenarios with some info such as possible zip codes you want to buy in, your FICO, downpayment amount, etc. That will give you an idea of what options you could possibly have if you want to start the purchase process. Let lender also give you what monthly payment PITI after obtaining the DSCR would be like based on each scenarios

2. Identify some properties you might want to buy, do your numbers and also determine DSCR ratio by the formula above. This is to get you a financial idea. The lender will calculate themselves too during the underwriting process.

3.Go property searching with a realtor, decide on one and get a purchase contract. Go then to the lender you spoke to and work with them to put your required files together for the DSCR loan application.

4. Make sure you know what property rents for/ will rent for. Either, the lender will calculate that himself too.

4. The DSCR loan process: find lender-> submit application->rent schedule->approval(depending on lender.

I hope all I've said has been informative

Ernesto Garcia · Answer

Hey Carissa,

DSCR loans are mainly asset-based which means the underwriters will use the property's income vs expenses to gauge if it's profitable. Your personal FICO or credit score is a factor but not as major as the actual DSCR itself. For a DSCR loan, the documents required are very minimum. We want to see that you have the cash to close, that the property can cash flow, that your FICO is at least 660, clear title, and then the deal can be funded.

Since a DSCR loan is tailored for investors- this is classified technically as a "business purpose loan" or a "commercial loan" even if the property isn't commercial 5+ doors.

Many DSCR lenders Will require that you close under an entity for that purpose.

Ideally, you want to speak with a loan officer first. Once you have a better idea of what financing you qualify for and the price range you will have a pre-approval letter from the lender. After that- you can have an agent find deals within that criteria, submit offers, hope one gets accepted, and then start the loan process.

There are many benefits when closing under an entity. For one- the liability is not to your personal name. With a properly structured LLC, you can mitigate many risks of being a landlord/investor and protect your personal assets. Additionally, these loans will not reflect as debt on your credit score. Since they are recorded under the entity, your business carries the debt. This means that you can grow your investment portfolio without limiting your personal credit.

Devin Peterson · Answer

Carrisa, would be happy to explain all of this to you And and east way to approach the game over a call. Send me a pm!

Buying 2-4 unit mult-fam under LLC -what are the steps for funding - must it be comm?

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