Do owners need to be guarantors in mortgages held by a business

[DiscoChick]

ok I am new here but I have a question. Banks say they can offer residential mortgages to companies that rent out residential homes, however they still need the business owner to be a guarantor, I am curious why is that? And it is absolutely necessary in Alberta as a bank rep informed me Thanks

 

[Sherilynn]

One purpose of a corporation is to limit the financial liability for the owners of the corporation. The liability is limited to what the corporation owns. So the corp could own the property in question, and nothing else. If that property drops substantially in value and the corp defaults on the mortgage, then if the bank forecloses it would have a property worth less than the debt, and the limitation of liability would prevent the bank from recovering its loss.



The banks can't tolerate that, so they require a personal guarantee on any lending for the corporation so they can recover their losses from the owners' personal holdings.



When asked for a guarantee, I would never allow a blanket guarantee that covers all borrowings from that bank. I would pay the extra $125/guarantee and have a guarantee for each LOC or mortgage, so that when that particular loan is discharged, the guarantee can be discharged with it. No need for the bank to have unlimited access to your personal accounts.

 

[Thomas Beyer]

[quote user=DiscoChick]I am curious why is that?
Because they can.



Always be aware of the golden rule: He who has the gold, makes the rules !

 

[DiscoChick]

So it is not true then that it is a Provincial regulation that a guarantor is required?



Anyway wouldn't acting as a guarantor affect my debt servicing? I would like to acquire more rental properties however because I already have 2 mortgages I can't qualify for any more, which is too bad because the units are actually profitable with the rent covering the mortgages, taxes, maintenance and savings for the business. I was also told by a bank rep that an individual is only allowed a fixed number of rental units, any number in excess will need to be owned by a business (title). So, I am thinking maybe if I rolled the mortgages under the business name it would reduce my debt servicing, but not sure how that would work if I am still a guarantor.

 

[Sherilynn]

There must be some confusion between you and your lender. You may own as many properties in your personal name as you like. Each lender has their own maximums. Some may only allow 4 properties in total, some may allow 6 properties with their bank and don't care how many you have with other banks, some have a max dollar amount that they will lend you, some will go to 16 properties in your name, and so on.



Find a mortgage broker that specializes in real estate investors so that he or she can formulate a plan that won't cut you off at the knees.

 

[Sherilynn]

As for debt servicing, when you have only a few properties, your personal income, personal debt, investment loans, and everything else are thrown into the same pot and analyzed.



People say the first property is the hardest, but I would argue that the 3rd and 4th are, specifically for this reason.



Once you have about 4 properties, the banks will start looking at them as a portfolio, and your personal income will not be expected to cover that debt. However, your rent must be at least 1.2 times the expenses (P + I + T, + condo fees, + possibly heat).

 

[Thomas Beyer]

[quote user=DiscoChick]I was also told by a bank rep
Do not go to a bank for a mortgage !



Go to a mortgage broker that knows how to deal with investors, and which banks to approach.