Can an LLC Buy a House With an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration, designed to help individuals purchase homes, particularly those with lower credit scores or limited down payment funds. A Limited Liability Company (LLC) is a business structure that provides liability protection for its owners, separating personal assets from business debts. FHA loans are generally not available to LLCs for purchasing a house.

Understanding FHA Loan Eligibility

FHA loans are specifically designed to promote individual homeownership and come with strict eligibility requirements, primarily focusing on owner-occupancy. The borrower must intend to occupy the property as their primary residence, typically within 60 days of the loan closing, and maintain occupancy for at least one year.

FHA guidelines also stipulate that the loan borrower must hold the property title in their personal name, not under an LLC or other business entity. Beyond occupancy, FHA loans have other criteria for individual borrowers, such as credit score requirements. Borrowers generally need a minimum credit score of 580 for a 3.5% down payment. Lenders also review debt-to-income ratios, typically looking for ratios under 43%, and require the property to meet specific safety, soundness, and security standards.

LLCs as Property Owners

An LLC is recognized as a distinct legal entity, separate from its individual owners. This separation is a primary reason individuals or groups form LLCs to hold real estate, as it offers significant liability protection. An LLC can shield personal assets from potential lawsuits or financial claims related to the property, meaning that if an incident occurs on the property, the LLC’s assets are typically at risk, not the owner’s personal home or savings.

LLCs can offer certain tax benefits, such as pass-through taxation, where income and expenses flow directly to the owners’ personal tax returns. They also provide flexibility in managing investment properties and can facilitate partnerships among multiple investors. However, an LLC, being a business entity, cannot physically occupy a property as a primary residence. This conflicts with the FHA’s owner-occupancy rule, making an LLC ineligible for an FHA loan.

Financing Options for LLCs

Since FHA loans are generally not an option for LLCs, alternative financing solutions are necessary for acquiring real estate through this business structure. One common route is securing conventional investment property loans, which are designed for non-owner-occupied residences. These loans typically require higher down payments, often ranging from 15% to 25% or more of the purchase price, and may demand higher credit scores, frequently 620 or above.

Commercial real estate loans provide another avenue for LLCs, particularly for multi-unit residential properties with five or more units, or for commercial spaces. These loans are typically obtained from commercial banks and include various types such as permanent loans, bridge loans for short-term needs, and Small Business Administration (SBA) loans. The terms and requirements for commercial loans differ significantly from residential mortgages.

Portfolio loans offer additional flexibility, as these loans are originated and kept by the lender rather than being sold on the secondary market. This allows lenders to set their own underwriting criteria, which can be more lenient for borrowers. Private lenders and hard money loans provide non-traditional financing, often characterized by faster approval processes and more flexible terms. However, these options usually involve substantially higher interest rates and higher fees compared to conventional financing.