Will a business loan affect getting a mortgage? The answer is very simple, yes and no. As long as getting a business loan will affect your credit score, it will run towards getting a mortgage. This will also be dependent on the type of business loan you go in for and business structure.
Let’s narrow our answers down to something simple. The type of business loan you go in will surely affect your credit. For example, funding a business with personal loans like home equity loans and line of credit loans can affect your credit unless you make payment on time.
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How business loans affect credit score (business structure)
In the situation of a business structure, when your business is a sole proprietorship, your personal credit is regarded as your business credit. This means that anything that goes wrong in your business in terms of a loan application, it will surely affect your credit. The sole proprietor will be liable when the loan used for the business goes into default.
When the business fail to make repayment, the lender can choose to collect the money from you personally. In this situation you become a co-signer and your credit score gets affected. Unless maybe you use credit card in financing your business and making payments on time.
This applies to a partnership business, at the point where a loan is being default, the partnerships involved will be held liable. Therefore credit score of these partners will be affected when loan goes into default. Lenders request for credit details of partners who are in a partnership business for loan applications.
On the other hand, there wouldn’t be any effect on your credit if your business is a Limited Liability or Company. With this line of business, shareholders are not held accountable or liable when it comes to company operations.
When a loan accessed by a limited company goes into default, shareholders are not held liable which doesn’t affect their credit score.
You shouldn’t be confused about the direction of this article. We want to find out if a business loan will affect getting a mortgage right? What can really cause that to happen is the credit score. That is why we have been talking about the credit from the beginning.
Mortgage lenders and credit score
Mortgage lenders take into consideration your credit score plus other factors before approval. This means when you have a very poor credit, you are likely to be turned down.
When the business fail to make repayment, the lender can choose to collect the money from you personally. In this situation you become a co-signer and your credit score gets affected. Unless maybe you use credit card in financing your business and making payments on time.
How to prevent your business loan from negatively affecting a mortgage loan application
There are several ways to do things that won’t affect getting a mortgage loan because of a business loan. As a business you can simply maintain your credit intact if you forgo sole proprietorship and partnership businesses. Try engaging in a limited liability, S and C Corporations.
Use credit cards for business funding and make repayment on loans on time, in this way your credit won’t be affected.
From the above write up, we can conclude that, a business loan can affect getting a mortgage negatively or positively. We hope this piece was able to give you a clear picture on the question: will a business loan affect getting a mortgage? The main factor for this effect is your personal credit score and as a business entity.
As a business, it will be advisable to keep your personal credit out of business credit or issues.
