What To Do If You're Applying For A Mortgage And A Business Loan
Melody Johnson7-minute read
September 18, 2020
As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessSM.
Looking for a business loan and a mortgage at the same time is a lot like doubling down at the poker table. Lots of action and twice the risk can bring excitement and forward movement.
Taking out two loans isn’t exactly the same kind of gamble, but there are still plenty of factors to consider. Shopping for both a mortgage and a business loan at the same time can make your credit picture a little more complex than if you decided to pace yourself or had the freedom to search out both loans separately.
But that doesn’t mean you shouldn’t do it. Growing or starting a business and moving into a new home at the same time isn’t unheard of; it’s just a lot of action that needs to be managed with care. Follow these quick tips if you have no choice but to go “all in” on both a mortgage loan and a business loan at once.
Beware Of Racking Up Hard Pulls
First, know this: traditional lenders like banks or other mortgage lenders perform what is called a “hard pull” on your three-digit FICO® Score whenever you apply for a mortgage, business loan, auto loan or other loan. Hard pulls can ding your credit score by a few points, but numerous hard pulls could possibly impact your credit score more substantially.
If you’re shopping for both a mortgage loan and a business loan at the same time, you might see your credit score drop slightly because of hard pulls. The good news? It won’t drop by much. That’s because hard pulls for the same type of loan or credit during a short period are counted as just one.
For example: Say you’re shopping for a mortgage loan and you apply with six different lenders during a 1-week period. All six of the hard pulls from these lenders will be treated as just one total credit pull, meaning your credit score won’t dip too much.
As you check into your options, be aware that the number of applications you submit may increase the impact on your credit score. But don’t let the fear of a credit-score drop prevent you from shopping around for both business and mortgage loans. Comparing fees and interest rates from several lenders is the best way to get the most affordable loan.
School Yourself on Mortgages
When you apply for a mortgage, your lender will look carefully at your debts, income, employment status and credit. Most mortgage lenders have strict credit criteria when they consider making a long-term investment in a borrower. After integrating lessons learned from the 2008 financial crisis, lenders have made today’s screening practices more stringent than ever.
Lenders will look closely at your FICO® credit score. This score measures how well you’ve paid your bills and managed your debt. If you make a credit card payment 30 days or more past its due date, for instance, this late payment will be reported to the three credit bureaus of Experian™, Equifax® and TransUnion®. A single missed payment could cause your credit score to drop by 100 points or more.
The key to qualifying for a mortgage at a low interest rate, then, is to pay all your bills on time each month. It helps, too, to pay down as much of your credit card debt as possible. Having a lot of this debt can also cause your credit score to drop.
Follow best practices by getting preapproved for a home loan before you start shopping. This will enable you to understand how much house you can afford. During the preapproval process, you’ll provide lenders with proof of your income in the form of copies of your most recent paycheck stubs, W2 forms, bank account statements and tax returns. Your lender will study this information, and pull your credit, to determine how much mortgage money it is comfortable lending to you.
Getting preapproved makes you a more attractive borrower. Home sellers like working with buyers who have proven they can already qualify for a mortgage. Getting preapproved can also save you time when searching for a home: You won’t waste time looking at $300,000 homes if you’ve only been preapproved for a mortgage of $200,000.
Compare Alternative Business Loan Structures
Like your mortgage lender, your business lender will do a hard pull on your credit when you apply for a business loan from a traditional bank. Again, this hard pull will only drop your score slightly, usually by 5 points or less, and for only a short time.
If you really don’t want an extra hard pull on your credit reports, though, there are several alternative types of business lending that typically don’t require a credit pull. These are two of the most popular:
- Invoice financing: With this option, lenders give you a cash advance of around 85% of the value of your outstanding invoices. They pay the 15% to you later, minus fees, after the client has paid up. Many invoice financing companies do not require a credit pull.
- Merchant cash advances: A lender will give you a fast cash advance in exchange for a portion of your business’s daily credit card proceeds. Some merchant cash advance companies do not require a credit pull.
Pay Off Your Credit Cards, But Keep The Accounts Open
While it may seem counterintuitive, closing old accounts could make your credit history look shorter, which could affect your score unfavorably. So, we advise you to pay off your credit cards and keep your accounts open after you’ve done so. This will enable you to show a longer credit history and a lower debt-to-credit ratio.
Keep An Eye On Mistakes
Pull your credit report from all three of the major credit bureaus and study it meticulously. Are there any errors? An estimated 25% of credit reports contain mistakes, so make sure your score isn’t suffering due to someone else’s error. Those mistakes – such as an auto loan payment that is mistakenly listed as late when you paid it on time – could cause your credit score to fall by 100 points or more.
If you do find mistakes on your credit reports, report them to the offending credit bureau.
Does A Business Loan Affect Personal Credit?
You know that mortgage lenders pay close attention to your three-digit FICO® credit score. If your score is too low, you won't qualify for a mortgage. And if you do, your loan will come with a higher interest rate. That leads to the big question: Can your business loan hurt – or help – your credit score?
The answer, not surprisingly, is complicated.
If you as a sole proprietor or partner in your business personally guarantee your small business loan, it can impact your credit score. Under such an arrangement, if your business fails to make its payments, the lender of your business loan can try to collect its missing dollars from you personally.
This makes you a co-signer on your business loan. This means that the debt can show up on your credit reports. The more debt you have, the worse it is for your credit score and your efforts to get into a new home.
If you rely on business credit cards to fund your small business, you can again impact your personal credit scores. This is especially true if you operate as a sole proprietor. In such cases, your business and personal credit will be the same.
This means that if you make your business credit card payments on time each month, it will help your credit score. But if you make payments 30 days or more past your due date, your score will drop because these payments will be reported as late to the three national credit bureaus of Experian™, Equifax® and TransUnion®.
Maybe you’ve taken out a home equity loan or line of credit to help fund your small business. This can definitely impact your credit score. Make those home equity payments on time, and your credit score will rise. Make them late, and it will fall. Of course, taking out home equity loans to support your business comes with an even bigger risk: If you default on these loans, your lender could take your home through the foreclosure process.
If you want to keep your business and personal credit separate, don’t work as a sole proprietor.. Instead, incorporate as an LLC, S Corporation or C Corporation. This way, your business loans or credit will not impact your personal credit score.
Does Having A Mortgage Affect Getting A Business Loan?
You might think your mortgage loan has no effect on your chances of qualifying for a business loan. After all, your business plan, past entrepreneurial successes and your company's sales history are what really matter, right?
Not entirely. It's true that lenders will look at your history of running businesses and your business plan when deciding whether you qualify for a business loan. But they will also look at your personal credit history and credit score.
This makes sense: Your credit score illustrates whether you've paid your past debts back on time and how well you've managed your credit. This gives business lenders information on how likely you are to pay back a business loan, too.
If you make your monthly mortgage payments on time, your personal credit score will improve. If you have a history of late payments, it will fall. Your mortgage loan, then, can play a significant role in determining whether you qualify for a business loan.
Rethink Your Timing
While applying for a mortgage and business loan at the same time is possible, you might reduce some stress if you close on your mortgage first and then seek out a business loan. In the meantime, you may able to find temporary alternatives to a business loan, such as adjusting your timeline, expenses or expectations. By approaching it this way, your mortgage rates won’t be affected by your business interests and pursuits.
Embarking on a dual-action plan of both a mortgage and a business loan isn’t for the faint-hearted. Consider these tips and do what’s best for you. No matter what you decide, exciting times are ahead – and you’ll feel more confident having an informed plan!
Meredith Wood is editor-in-chief and vice-president of marketing at Fundera, a marketplace for small-business financial solutions. Specializing in financial advice for small-business owners, Wood is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
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