Can you use a small business loan as the down payment on a house?

Question

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?

Answer 1

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.

Answer 2

You probably can do it, but there are some important considerations:

1. Mortgage rates are typically lower than other types of loans, including business loans. This alone may be reason enough to avoid it.
2. 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).
3. 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.
4. 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.