A business loan can, in some situations, affect your ability to get a mortgage. Your mortgage lender will be interested in the degree to which you’ve combined your business finances with your personal finances. This includes how your business is structured, whether you’ve personally guaranteed the business loan and how closely your personal and business credit are linked.
Generally, being held personally responsible for a business loan puts you at a disadvantage when applying for a personal mortgage. It can make it a challenge to get approved and secure the best interest rate.
Links between your business and personal finances
Here are some common ways your business finances can become intertwined with your personal finances and draw the attention of your lender:
Your business entity type can affect your application for a personal mortgage. For example, in a sole proprietorship, you and your business are legally the same, which means you’re personally responsible for business debts. Similarly, if you are a general partner in your business, you can also be held personally accountable for the entire amount of the business debts, regardless of a partner’s ownership percentage.
In contrast, other business entities are structured to prevent personal liability for business debts. For example, in a limited partnership arrangement with at least one general partner and one limited partner, the limited partner isn’t typically responsible for business debts. The same holds for most corporations and limited liability companies, or LLCs, which are considered separate legal entities.
Personally guaranteeing a business loan generally creates a link with your personal finances. A personal guarantee is when you agree to be responsible for the loan repayment should the business fail to make payments.
A personal loan guarantee can be limited or unlimited. You are only responsible for a portion of a loan if you agree to a limited guarantee. In contrast, with an unlimited guarantee, you’ll be responsible for the entire loan amount.
Business credit history
It’s recommended that you keep your business and personal credit separate. However, depending on your business entity and how your business loan is structured, a mortgage lender may want to review your personal and business credit history. Areas of concern typically include the number of hard credit pulls, late payments and defaults.
Ways to separate your personal and business finances
Keeping your business and personal finances separate can protect your personal assets and credit. Here are some common options for doing that:
Create a company website and email address.
Open a separate business banking account.
Get a business credit card.
Use your business name to set up utility and other accounts.
Apply for credit under the business’s name.
Don’t make purchases or pay bills with personal accounts.
Consider structuring your business as an LLC or corporation.