True or False: All hard money loans require an LLC?

Question

Just had a hard money lender claim that all hard money loans would require an LLC. First I've heard of it (but also first time I've looked into hard money). True or false?

Jeff S. · Answer

False, sometimes.  Here’s an explanation, @Evan C.

Most private/hard money lenders will only make business purpose loans and leave consumer purpose loans to the conventional lenders (BofA, Lending Tree, etc.).

Dodd-Frank presumes that real estate loans made to an LLC are for a business purpose.  Thus, many private/hard money lenders will only make a loan to an LLC. This is not required, however, since there are other ways to ensure the loan is for a business purpose loan.

A wise lender will always ask the borrower to document what the money is being used for.  If the money is not used for personal, family, or household purposes, it is also considered a business purpose loan.  Loans for flips, as examples, are business purpose loans and would not require an LLC under Dodd-Frank.  In this case, state permitting, such as in CA, you could make the loan in the name of the individual.  We’ve done this, though there are reasons we encourage an LLC anyway.  Other states are stricter.

Some states require an LLC for a business purpose loan, and some do not. If the lender you spoke to is making a blanket claim that an LLC is always required in every state, they are wrong.  If their claim is specific to the state in which the loan is being made, they could be right.  Similarly, it could just be their policy.  You might ask them to clarify

Evan C. · Answer

@Jeff S. that is an incredibly helpful explanation, thank you. As I've been calling around most are requiring it, for whatever reason. And since nobody seems to sell to conventionally financed buyers these days it looks like I'll be heading down that road.

Sean Blomquist · Answer

@Evan C. that is false.  That lender may require it, but other lenders will do either your personal name or an entity (LLC or Inc).  Some states may have regulations on it, so check with your particular lender.  I know in MN they can only lend to an LLC if the loan is under 100k.  Anything over 100k can be to either.

Evan C. · Answer

@Derek Dombeck Thanks, this is interesting. I wonder if it's a regional or state thing? Two lenders in NC that I've contacted DO require it. The respondents from WI and MN do not, but NJ does.

Derek Dombeck · Answer

False. I don't require an entity. I highly recommend it for other reasons, but it won't disqualify someone from getting a loan with us.

David M. · Answer

@Evan C.

Haven’t used hard money, but every lender I’ve spoken or others who have used have pretty much said needed or used LLC...

Evan C. · Answer

@Sean Blomquist Thanks. Yea this was just in the pre-approval stage so I wasn't even discussing amounts yet. Strange thing to claim.

True or False: All hard money loans require an LLC?

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