My wife owns a small business and is looking to purchase a barn or small warehouse to store some of her rental items. We are also looking to purchase a new home for our family. Can she acquire a loan through her business of say $25,000 and then use that money as the down payment on a house that also has a barn on the property?
2If the business spends $25,000 in something, it has to get something else of a $25,000 value in exchange. The money cannot be just "gone". Otherwise, if your wife's business goes under, she could be sued for embezzlement, as any creditor (for example the one that provided the loan) would want those $25,000 available to pay the standing debts. And if the creditor does not get the money (and in the event of your wife's business foreclosure you will probably be short on funds), the creditor may try to go after what was bought with it (the house).– SJuan76May 28, 2019 at 17:54
3The idea of using corporations is to separate personal and business assets and expenses. Mix them together and you lose the legal protections that corporations offer, which of course increases your risk.– SJuan76May 28, 2019 at 17:57
1@ChrisW.Rea: Please don't confuse answers with non-answers. Answers have to answer the question. The question is about whether the proposed transaction is possible. Chris explained why it is not a good idea, without even marginally addressing if it is possible. Ergo, it would be wrong to post that comment as an answer.– Ben VoigtMay 29, 2019 at 3:45
Much like the question asked previously, the two most important things in obtaining a mortgage is debt-to-income ratio and income. Equity in the house being purchased is important but that can be nearly zero if one is using some kind of "mortgage insurance". PMI (private mortgage insurance), VA, and FHA are kinds of mortgage insurance which make down payments almost unimportant.
The key issue with your scheme is that it might throw your debt-to-income ratio to unacceptable levels. At least in the short term, her profitability (and thus income) will decrease and her debt obligations may increase (depending how the business is organized).
So while it is possible, you are probably better off just applying for an FHA loan. If you have a 580 credit score, you only need 3% down provided you meet income and debt-to-income guidelines.
What you are planning in your question could jeopardize her business due to cash flow issues and may force it into closing. You don't want that.
4Aren't loans to create larger down payments looked on by banks as kind of sketchy?– RonJohnMay 28, 2019 at 16:51
You probably can do it, but there are some important considerations:
- Mortgage rates are typically lower than other types of loans, including business loans. This alone may be reason enough to avoid it.
- Mortgage application documents usually ask you the source of your down payment. This includes other loans and even gifts, in which case you may have to provide legal documentation from the gifter that they do not expect to be paid back (to prevent against it being an undeclared private loan).
- As already mentioned, your debt-to-income ratio will go up, reducing the amount of house that you can afford, though as long as you aren't close to the max this wouldn't be a deal breaker.
- The $25K can't just leave the business in order to purchase a personal asset. Either the barn is purchased by the business (which would be convenient if it happened to be worth $25K), or perhaps the $25K gets loaned to you personally. Another option is the business could rent the barn from you, but then you have personal taxable income in the same amount (which is fair since the business would be deducting the same amount and reducing its tax).
I can think of a possible benefit though:
- If your situation is such that you do not itemize your taxes, you will not be able to personally deduct your mortgage interest. But the business may be able to deduct the interest on a business loan.
@4: That completely depends on the type of business as well as on the legal system we talk about.– glglglMay 28, 2019 at 19:06