Can You Get a Business Loan to Buy a House?
Clarify if a business loan can fund your home. Understand the key distinctions between personal and business property financing for real estate.
It is a common inquiry to consider using a business loan to purchase a house. Business loans are designated for commercial purposes, while personal loans are for individual use. The nature of the property’s intended use dictates the type of loan that can be pursued.
Distinguishing Business and Personal Property Use
Lenders maintain a strict separation between business and personal assets and liabilities, which directly influences loan eligibility for property purchases. A business loan is typically not suitable for acquiring a purely personal residential property. The primary reason is that business loans are underwritten based on the commercial viability and purpose of the asset being financed.
A legitimate “business purpose” for real estate involves properties intended for commercial operation. This includes purchasing an office space, a retail storefront, a warehouse, or a mixed-use property where the dominant intent is commercial activity. For instance, an SBA 7(a) loan explicitly states that funds cannot be used for investment properties, including single-family homes or apartment complexes, if the business does not occupy the building. The Small Business Administration (SBA) requires the business to occupy the building it uses, often mandating at least 51% owner-occupancy for existing buildings and 60% for new construction. This ensures the property serves the business’s operational needs rather than being a passive investment or personal residence.
Business Real Estate Financing Options
When a property genuinely serves a business purpose, several financing options become available. These options are distinct from residential mortgages and are tailored to the unique financial structures of businesses. Traditional commercial mortgages are a common choice for purchasing business premises. These loans are secured against the commercial property itself and are typically long-term, often extending up to 25 years. Lenders usually finance around 70% to 85% of the property’s value, requiring the business to provide the remaining portion as a down payment.
Small Business Administration (SBA) loans are another significant avenue, particularly for small businesses. The SBA 7(a) loan program is highly flexible, allowing funds to be used for acquiring, refinancing, or improving real estate, alongside other business expenses. The maximum loan amount for a 7(a) loan is $5 million, with repayment terms for real estate extending up to 25 years.
Another specific option is the SBA 504 loan, designed exclusively for purchasing fixed assets like real estate or land, as well as for construction or improvements. This loan involves a partnership, with a private lender funding up to 50% of the project, a Certified Development Company (CDC) financing up to 40%, and the borrower contributing a minimum 10% down payment. SBA 504 loans offer long-term, fixed-rate financing, typically ranging from 10 to 25 years.
Lender Requirements for Business Property Loans
Lenders assess several criteria when evaluating a business real estate loan application to ensure the business’s capacity to repay the debt. A business’s financial health is paramount, with lenders scrutinizing revenue, profitability, and cash flow to determine repayment ability. They often review detailed financial statements and tax returns for the business. The owner’s personal credit score also plays a role, as it provides an indication of financial responsibility, especially for smaller businesses or those without an extensive financial history.
Down payment requirements for commercial real estate loans typically range from 10% to 30% of the purchase price. For instance, SBA loans may require as little as 10% down, while conventional loans often demand 20% to 30%. Collateral is almost always a requirement, with the property itself serving as the primary security for the loan. Lenders may also require additional security, such as a personal guarantee from the business owner, making them personally liable for the loan if the business defaults. A clear and viable business plan outlining the property’s intended use and how it will generate income or support operations is also crucial.
Structuring Business Owned Property
When a business acquires and owns real estate for its operations, the chosen legal structure carries significant implications for liability and taxation. Common legal structures include purchasing through a Limited Liability Company (LLC), an S-Corporation (S-Corp), or a C-Corporation (C-Corp). Owning property through an LLC can provide liability protection, separating personal assets from business debts and obligations related to the property.
Tax benefits are often associated with business property ownership, provided the property is used legitimately for business purposes. Businesses can generally deduct property taxes paid on real estate used for commercial operations as an ordinary and necessary business expense. Additionally, mortgage interest paid on business property loans is typically tax-deductible. Only the interest portion of the mortgage payment is deductible, not the principal repayment.
Depreciation deductions also provide a significant tax advantage, allowing businesses to recover the cost of the property over its useful life. The Internal Revenue Service (IRS) sets guidelines for these deductions, which can reduce taxable income.