Getting a business loan will have an effect on your credit score. Moreover, if it’s not handled correctly, it could make it harder to get approved for a mortgage.
A business loan along with mortgage can create a lot of forward momentum, but at what cost?
Like any other loan, business loans impact your credit history. And your credit rating is a big factor in the mortgage approval process.
A business loan will affect your mortgage process in so far as it affects your credit score. Mortgage lenders will review your personal credit history and personal finances to assess your eligibility, so keeping these in good order is essential. The solution, then, is to strengthen your credit and choose business loans with smaller effects on it.
Being aware of all the things that affect your credit is important. Your employment status is another key factor mortgage lenders consider during the application process. In this article, you’ll find some good ways to keep your credit score healthy when applying for a mortgage and business loan.
Mortgage lenders view approving a mortgage as a long term investment in the borrower, so they carefully evaluate all aspects of your financial profile.
How Small Business Loans Affect Mortgage Approval
Mortgage lenders will always look for stable credit when deciding on a mortgage approval. Small business owners may face additional challenges when applying for mortgages due to their complex financial situations and the need for extensive documentation.
Business loans don’t figure into the math when requesting a mortgage. Especially if the loan is in the service of a limited liability company.
However, all loans impact consumer credit in multiple ways. When applying for a loan, the lender may do one of two different credit checks and each impacts your credit in different ways.
A “soft pull” inquiry is fairly routine and does not affect your score. The file access might show up but won’t negatively impact the report. When you request a credit report, that report calls for a soft pull.
A “hard pull” inquiry, on the other hand, does impact your score. Things like car loans, home loans, and some student loans trigger a hard inquiry. Every hard pull gets noted in a credit report.
Many hard inquiries in a short period of time have a negative impact on mortgage terms. It could result in worse terms or a higher interest rate.
It’s also a good idea to do a credit score analysis with professional help. Every bit helps when applying for a mortgage.
When two lifelong renters, Tim and Brenda, decided to become homeowners, they struggled to pay bills on time, highlighting the importance of paying bills promptly through dedicated accounts.
They were having trouble paying their bills on time and a few of their credit cards reached their limit.
Tim used a credit analyser program to create a detailed plan for improving his credit. Following the plan quickly netted a 50-point increase in his score.
They were able to get a mortgage and move into their new home within a month.
Traditional lenders will also want to see that the business can support the terms of a mortgage. To this extent, a coherent business plan may help improve mortgage terms. Lenders may offer different terms for mortgages depending on the applicant’s business structure and financial records.
To prepare you for a successful mortgage request, here are some options to make it easier. These can minimize or avoid the damage to personal credit scores altogether.
Business Finances and Mortgage Applications
When you’re a business owner looking to get a mortgage, your business finances can play a significant role in the mortgage application process. Most mortgage lenders will take a close look at both your personal and business finances to assess your overall financial health. If you’ve taken out a small business loan—especially one that’s personally guaranteed—your personal credit score and credit history will be under the microscope during the mortgage approval process.
Keeping your personal credit separate from your business finances is crucial. By maintaining distinct accounts, such as a dedicated business banking account and a business credit card, you help protect your personal credit score and make it easier for lenders to evaluate your financial position. This separation also helps you avoid the pitfalls of commingling funds, which can raise concerns for mortgage lenders and complicate your application.
Lenders will also review your debt-to-income ratio, which includes any business loan obligations you’ve personally guaranteed. A high debt-to-income ratio or a history of late payments can negatively impact your borrowing capacity and may result in less favorable mortgage terms or higher interest rates. That’s why it’s important to keep your credit score healthy and your financial records—like tax returns, bank statements, and financial statements—well organized and up to date.
Traditional lenders and non-bank lenders offer a variety of business lending options, from merchant cash advances to invoice financing. Each loan type comes with its own interest rates and repayment terms, which can affect your ability to qualify for a home loan. Before applying for a mortgage, review your current loan obligations and consider how they might impact your financial situation and your application process.
Working with a mortgage adviser can be invaluable, especially if you’re self-employed or have complex business finances. A mortgage adviser can help you understand the strict credit criteria used by most mortgage lenders, guide you through the mortgage application process, and offer strategies to strengthen your credit score. They can also help you prepare the necessary documentation to demonstrate your financial stability, such as longer credit history, self-employed income records, and detailed financial statements.
If you’re considering an investment property or have unique circumstances, such as variable self-employed income, a mortgage adviser can explain the specific requirements for these loan types and help you navigate the mortgage market. They’ll ensure you’re well-prepared to meet lender expectations and improve your chances of mortgage approval.
Ultimately, managing your business finances wisely is key to achieving both business success and your personal goals, like getting a mortgage. By keeping your personal and business finances separate, maintaining a strong credit score, and working with a knowledgeable mortgage adviser, you’ll be in a strong position to secure the home loan you need—without letting your business loan affect your mortgage dreams.
Option #1 – Keep Track of Your Credit
Avoid hard inquiries unless absolutely necessary. A little preparation will go a long way when taking out a business loan or other bank loan.
Before you commit to requesting a loan, make sure you meet all the criteria. Find out what the lending criteria are for the business loan you’re considering. Then, make sure your business meets all those lending criteria.
The most important criterion will be your credit score. You can get a free copy of your credit score every year. Requesting your credit score this way counts as a soft inquiry, which won’t affect the score.
Restrict your loan applications to lenders that you are confident will approve the loan. Remember that every application will lead to a hard inquiry.
Remember that personal guarantees will also enter the picture. Lenders will require them if the business doesn’t have the track record to justify the loan. The loan amount can influence the extent of the personal guarantee required by the lender, as larger loan amounts may result in more comprehensive guarantees.
Option #2 – Put Off the Loan
Unless the business loan is critical to the business, consider getting it at a later date.
The simplest way to avoid adverse effects on your mortgage application is to do it before the business loan.
If the business is in dire need of capital, there may be other options. Things like a cash advance or another merchant cash advances could be a better short-term solution.
Option #3 – Alternatives to a Business Loan
Instead of a straightforward loan, there are options which can be kinder to your credit score.
To avoid the hard inquiries into your credit, consider other types of financing. These options will make capital available without affecting your credit.
Invoice financing is a form of receivables finance. It can work in two ways. You can finance specific invoices or hand over the full invoicing ledger.
In this way, you can receive a percentage of the invoice upfront. You’ll receive the rest of the invoice when it’s collected as normal. Typically, this service carries a fee of between 2% and 5% of the financed amount.
Merchant cash advances are another option. It’s not exactly a loan. Instead, the lender will provide a cash advance for a portion of your business credit cards transactions (based on historical figures, such as the past year’s). This can be a great way to get cash for a business without collateral.
Take Charge of Your Credit
There’s no reason that you can’t apply for both a business loan and a mortgage at the same time. However, if you can manage to space them out, you’ll have an easier time.
Instead of committing to a business loan, maybe there are other ways to get the capital you need. It all depends on how much cash you need and how quickly you need it.
Both mortgage and business loan applications will mean hard inquiries into your credit history. Make sure you are well qualified before you apply.
If you need collateral-free loans that don’t require a hard credit check, you’ve come to the right place. When you’re ready to take charge of your future, use our online form to find out if you qualify.
