Can a Business Loan Affect Your Mortgage Approval?

VP, Senior Loan Officer - Mortgage

Key Takeaways

• A small business loan usually won't affect your mortgage approval - but exceptions exist.
• Personal guarantees or business debt can raise your debt-to-income ratio.
• Separating business and personal credit protects your mortgage eligibilty.

When it comes to personal finances and homeownership, getting a small business loan might not seem like it should affect your mortgage application. In theory, one supports your business while the other relates to your personal credit. However, for many entrepreneurs, the two can become intertwined - making it important to understand when a business loan might influence your mortgage eligibility.

Scenarios Where a Business Loan May Affect Mortgage Approval

In most cases, business and personal finances are distinct, especially when operating under an LLC, C-Corp, or S-Corp. These structures create a financial barrier between the owner and the company. However, there are scenarios where business debt could still impact your mortgage application.

• Sole Proprietors - Without a legal business entity, lenders view you and your business as one. Your business loan payments count toward your personal debt-to-income (DTI) ratio. If your DTI exceeds 45%, securing a favorable mortgage rate becomes challenging. 
• General Partners - Partners share liability for business debts. If your business faces financial issues or defaults on a loan, lenders may view you as higher risk. 
• Personal Guarantees - If you've personally guaranteed a business loan, you bear direct responsibility for its repayment. Any missed payments can affect your credit score. Mortgage lenders will factor in that potential liability.
• Business Credit Cards - Late payments on business credit cards tied to your name can reduce your credit score and make home loan approval harder.
• Businesses Reporting Losses - If you own or have a major stake in a company showing losses, lenders may worry about your ability to manage personal debt.
• Recent Credit Inquiries - Each hard inquiry for a business loan can lower your credit score by a few points and signal potential instability to mortgage lenders. 

How Personal Credit Impacts Business Loan Eligibility

The relationship between business and personal credit goes both ways. Your personal credit history often influences your ability to qualify for a business loan. Traditional lenders usually look for scores above 700, while the Small Business Administration (SBA) may accept applicants with scores as low as 650 if other business fundamentals are strong.

Steps to Separate Personal and Business Finances

To prevent business debts from affecting personal goals like buying a home, create a clear boundary between your business and personal finances. This includes registering as an LLC or corporation, maintaining separate accounts and credit cards, and paying yourself a consistent salary. Avoid using business funds for personal expenses and vice versa.

For more detailed guidance, consult resources from the U.S. Small Business Administration(SBA).

Ready to Apply for a Mortgage? 

At Bank of Hope, we understand that balancing entrepreneurship and homeownership takes careful planning. Our Mortgage Banking Division can help you explore financing options that support both your business and your family's goals. Talk with a home loan expert today to learn how we can help you acheive both.