DSCR Loan for LLC

Last updated: April 15, 2024

Many rental property investors are surprised to learn that the vast majority of DSCR lenders require the borrowing entity to be an LLC or Corporation because DSCR loans are business purpose loans. Since LLCs are the most commonly used entity to own real estate, nearly all DSCR loans are given to LLCs. It is very uncommon for DSCR lenders to allow title to be held in personal name and it is easy to transfer title from your personal name to an LLC in order to obtain a DSCR loan for your rental property.

Don't have an LLC? Have an LLC but aren't sure which documents you need for a DSCR loan? This article will be your guide.

DSCR LLC Checklist

Articles of Organization

Articles of Organization is a legal document that is filed with the appropriate state authority (usually Secretary of State) to formally establish a limited liability company (LLC). The Articles of Organization essentially serve as the LLC's "birth certificate" and provide essential information about the business. The specific name and requirements for filing Articles of Organization can vary by state, as LLC formation is governed by state law in the United States.

Information typically included in the Articles of Organization:

1. Name of the LLC: The legal name of the LLC, which must comply with the naming rules of the state. The state will make sure that name is available and you will need to choose exactly how you want the "LLC" component of the name to be formatted -- 'LLC', ", LLC', 'L.L.C.', ', L.L.C.', 'Limited Liability Company'.
2. Principal Place of Business: The physical address where the LLC conducts its primary business operations.
3. Registered Agent: The name and address of a registered agent, who is a person or entity designated to receive legal documents on behalf of the LLC. This person or entity must have a physical address within the state of formation. The registered agent is most commonly a member of the LLC, a lawyer, or a professional registered agent service.
4. Purpose of the LLC: A general statement about the purpose of the LLC. In many cases, this is a broad statement indicating that the LLC is organized for any lawful business purpose.
5. Duration of the LLC: Some states require specifying whether the LLC is formed for a specific duration or whether it is perpetual.
6. Management Structure: Some states may require disclosure of whether the LLC will be member-managed or manager-managed.
7. Organizer Information: The name and address of the person or entity responsible for filing the Articles of Organization. This is often an individual associated with the LLC or a professional filing service.

Once the Articles of Organization are prepared and submitted to the state, and the required filing fee is paid, the state reviews the document. If everything is in order and complies with state regulations, the state issues a Certificate of Organization or a similar document, officially recognizing the LLC's existence. It typically takes less than 30 minutes to register your LLC online directly with the state (not through a business registration service), and less than 2 weeks to receive your Articles of Organization. While processing speed depends on state and registration volume, it is most common to receive your Articles of Organization in 1-5 business days.

It's important for business owners to understand and adhere to their state's specific requirements for filing Articles of Organization, as the process can vary. Additionally, some states may refer to this document by different names, such as a Certificate of Formation or a Certificate of Organization.

DSCR lenders do not require LLC "seasoning". In other words, you do not need to have an LLC that was already registered in order to apply for your DSCR loan and begin processing. You can simultaneously apply for a DSCR loan and register your LLC. We call this a "To Be Formed LLC" or "To Be Formed Entity".

Operating Agreement

An operating agreement is a legal document that details the internal structure, management, and operation of your LLC. While an operating agreement is not required by law, it is required by DSCR lenders. An operating agreement it is certainly a best practice for all businesses as it establishes a strong foundation and expectations concerning the business' purpose and how it will be managed.

Components typically addressed in an operating agreement include:

1. Organization and Structure: Describes how the LLC is organized, its name, location, and the duration of its existence.
2. Members' Rights and Responsibilities: Outlines the rights, responsibilities, and voting powers of the LLC members (owners).
3. Management Structure: Defines how the LLC will be managed, specifying whether it will be member-managed (members make decisions) or manager-managed (appointed managers make decisions).
4. Distribution of Profits and Losses: Specifies how profits and losses will be allocated among the members.
5. Transfer of Membership Interest: Outlines the process and conditions for transferring ownership interests in the LLC.
6. Dissolution: Describes the procedures for dissolving the LLC and distributing its assets if the need arises.
7. Dispute Resolution: Addresses how disputes among members will be resolved.
8. Meetings and Voting: Details the frequency and procedures for meetings, as well as the voting requirements for decision-making.

Having a thoughtfully drafted operating agreement is crucial for the smooth functioning of an LLC and can help prevent conflicts by providing a clear framework for decision-making and dispute resolution. It is often created at the time of the LLC's formation, and all members typically sign it.

Common issues we see when processing DSCR loans for LLCs:

• One or more missing signatures -- make sure all members of the LLC sign and date the operating agreement.
• Missing membership percentage -- make sure the agreement includes a table that shows how much ownership each member has in the LLC.

Sample Operating Agreement for Rental Property

To streamline your borrowing experience, if you do not have an operating agreement, we are happy to provide you with our template which is specifically drafted for LLCs whose purpose is to own and manage rental properties:

• TEMPLATE - Single Member LLC Operating Agreement
• TEMPLATE - Multi-Member LLC Operating Agreement

Certificate of Good Standing

A Certificate of Good Standing, also known by various names such as a Certificate of Existence, Certificate of Status, Certificate of Fact, or Certificate of Compliance, is an official document issued by a state government or relevant authority. This certificate confirms that a business entity, such as a corporation or a limited liability company (LLC), is in compliance with the statutory requirements and is authorized to do business in that state.

If your LLC is older than 1 year, your DSCR lender will need a Certificate of Good Standing, or COGS for short which is used to confirm the following:

1. Active and in Good Standing: The certificate typically verifies that the business is active and in good standing with the state. "Good standing" means that the business has met its ongoing filing requirements, such as submitting annual reports and paying required fees.
2. Legal Existence: It confirms the legal existence of the business entity. This is important for entities operating in multiple states or seeking to engage in certain transactions that require proof of good standing.
3. Compliance with State Requirements: The certificate indicates that the business has complied with all state regulations, including filing annual reports, paying taxes, and maintaining a registered agent.
4. Authorization to Conduct Business: For businesses that operate in multiple states, a Certificate of Good Standing may be required to demonstrate that the entity is authorized to conduct business in a particular state.
5. No Pending Dissolution: It confirms that there are no pending dissolution proceedings or any other issues that would jeopardize the entity's ability to continue its operations.

If your LLC will own rental properties in another state, the state in which the rental property is located may require a Certificate of Good Standing in order to register a your LLC in that state as a "Foreign Entity".

Many states allow you to obtain your Certificate of Good Standing by filling out a simple online form on the state's website. In order to receive the Certificate of Good Standing, you need to make sure your LLC has filed its annual report. The Certificate of Good Standing is typically received same day for a small fee ranging from $5 to $40 depending on the state.

Foreign Entity Registration

If your LLC is registered in a state that is different from the state where the rental property is located, you will need to obtain a Foreign Entity Registration. This is a simply an official document that acknowledges that you have notified the state in which the rental property is located that your out-of-state ("foreign") LLC will be doing business in their state.

IRS EIN Letter

The IRS EIN Letter is an official document from the IRS that confirms the Employer Identification Number assigned to your LLC. If you do not have an IRS EIN assigned to your LLC, you can register directly on the IRS website.

IRS Form W-9

If you have an IRS EIN but you have misplaced the EIN Letter, you can simply fill out IRS Form W-9 and provide it to your lender. The Form W-9 is a request for taxpayer identification number and certification that the information is accurate.

The IRS EIN Letter or W-9 needs to be on file with your lender so that your Form 1098 annual mortgage statement can be provided to you and filed with the IRS. When you have a DSCR loan, the servicer assigned to your loan will provide you with Form 1098 generally in January or February. This form indicates how much you have paid in interest in the preceding year and you or your accountant will use it when filing taxes as mortgage interest is tax deductible.

Multi-Member LLC

If you have multiple members (owners) in your LLC, it is important to understand how each member's credit score will affect your terms and ability to meet DSCR loan guidelines. OfferMarket's DSCR loan program requires 51% of the membership interest in the LLC to serve as personal guarantor. So, if your LLC has two members, each with 50% ownership, each member will need to be a guarantor. When there are more than one guarantors, the credit score of the guarantor with the lowest credit score will be used to confirm terms. This can negatively impact the max LTV and highlights the importance of structuring your LLC membership and ownership so that 51%+ ownership is associated with high credit score members.