Loans in LLCs and Personal Credit

[Jessica Jay-Maleski]

Hello, all! 

I am currently in the process of refinancing my 4-plex along with buying two more rental properties. All of these loans will be in the name of my LLC (and the properties will also be owned by the LLC) rather than my personal name (yes I am aware that does little to protect my personal assets, but I've been very encouraged by by the ability to keep my personal credit out of the mix by taking the loan in the LLC). While I am still sussing out details, I am not positive if I will personally be considered a guarantor on the loan or if they will consider this loan to be entirely asset-based but either way, I do not anticipate the loans being reported under my name.

So my question begins here: hypothetically (and I understand there are probably a million variables), if I wanted to purchase a new primary residence, HELOC my current, etc and *assuming it will not show up on my personal credit report*, when applying for a new loan with a different bank, would you even bother to disclose ownership of rental properties? Is it realistic to say that "I" don't own any rental properties because they belong to my LLC, not me? Or is that just too much of a stretch, too likely to "get caught" if I don't bring it up and cause a lot of headache for everyone? ...or some other issue I am sure I am not considering?

I know every loan product is different, and that in some cases it would be of benefit for me to have the rental income included if I wanted to "amp up" my earnings (I know many lenders will credit you back like 75%), but for the sake of simplicity, let's assume my income from other sources is sufficient and I am trying to avoid the extra ppwk. 

I am absolutely not attempting to commit mortgage fraud or anything of the like - I am just looking to ensure that I make each move strategically so as to maximize my available credit while still staying honest. I am just curious if anyone else has dealt with the domino effect of moving things in and out of their personal name/LLC's, trying to make sure your taxes are legit while still reducing tax liability AND being strategic enough to ensure that when the first domino falls, the rest fall into the correct places (the ultimate dream, right?)

Any and all advice/feedback is appreciated. TYTYTYTY!

[Julee Felsman]

HI @Jessica Jay-Maleski!

You're not doing anything underhanded by making this shift. 

if the properties are financed in the name of your LLC and owned by your LLC and the LLC files a separate tax return (say, form 1065 as a partnership), then then standard (Fannie Mae) rules would mean these would not be included as an asset on your loan application.

If the LLC is single-member and you show the properties on your personal tax return, a lender will still consider them "yours" and they'll be on your personal application.

A few further considerations, if the properties showed up on your personal tax returns in prior years, you may be asked to show the new loan documents to evidence you don't have liability for the loan. More than likely the bank will have you guarantee the loan... if the LLC defaults they will probably have the right to come after you.

So there could be a murky year or two when an underwriter may follow a breadcrumb trail that will pull the properties back into the mix.

And of course, your ownership interest in the LLC will be something a lender will see as well. Your partnership will spin out a K-1 statement that shows income/loss from the properties and passes it through to you. So you'll need to provide the business tax returns and they'll be analyzed as part of your financial picture.

If you have W-2 income that is sufficient to qualify for whatever loan you've requested and your lender doesn't request/need tax returns your LLC is still pretty unlikely to fly under the radar.

Lenders pull all kinds of reports behind the scenes and the LLC and/or some of the real estate will likely come up on these searches, prompting the underwriter to ask about them, pulling them back into the mix.

My advice, as both a lender and a person with an LLC that holds all of my own rentals -- just disclose it up front.

1. You'll avoid the chance that a request will come up later in the process and delay closing.

2. Underwriters get really suspicious if the "find" something they think you're trying to hide. What else might you be hiding? You will have a lot of extra explaining to do and likely more paperwork in the end.

Cheers!

Julee