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Exclude Business Debt From Your California Jumbo Loan

Q: Why do mortgage lenders count my business debt against my personal debt-to-income (DTI) ratio?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: What specific documents do I need to exclude a business debt from my DTI calculation?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: What is the '12-Month Canceled Check Rule'?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: How are government-backed business loans like SBA, EIDL, and PPP treated for mortgage qualification?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: Can a business loan be excluded from my DTI even if it appears on my personal credit report?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: What are the pros and cons of paying off a business loan before getting a mortgage?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: How does my business's legal structure affect the way lenders calculate my debt?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

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TL;DR

Personal DTI Impact: Lenders often include business debts in a self-employed borrower's personal debt-to-income (DTI) ratio due to personal guarantees, which can complicate jumbo loan qualification.
Exclusion is Possible: You can have this debt excluded from your DTI calculation by providing clear and consistent documentation that the business, not you personally, has been making the payments.
The 12-Month Rule: The key is to supply 12 consecutive months of business bank statements or canceled checks showing the payments being made directly from business accounts. This guide explains how to properly document various loan types (including SBA, EIDL, and PPP) and navigate this process based on your business structure.

Why Do Lenders Count My Business Debt Against Me Personally?

For self-employed borrowers, securing a jumbo loan can feel like an uphill battle. One of the most common and frustrating hurdles is when a lender includes your business debts in your personal debt-to-income (DTI) ratio. This happens because of a single concept: the personal guarantee. When you sign a personal guarantee for a business loan, you are telling the creditor that if the business fails to pay, you will personally cover the debt.

Mortgage underwriters view this guarantee as a potential personal liability. Their job is to assess risk, and from their perspective, the business's financial health is not guaranteed. If your business revenue drops, that guaranteed loan could suddenly become your personal responsibility. This is especially critical in high-cost markets, where jumbo loan amounts are substantial and DTI ratios are scrutinized heavily. The lender's default position is to include the debt in your DTI unless you provide undeniable proof that it belongs solely to the business. The data, information, or policy mentioned here may vary over time.

What Is the Difference Between Business Debt and Personal Debt?

Understanding the distinction between business and personal debt is the first step to properly documenting your finances for a mortgage application. While it seems straightforward, the lines can blur, especially for sole proprietors.

Personal Debt: This is debt incurred for personal, family, or household purposes. Common examples include your primary mortgage, student loans, auto loans for personal vehicles, and credit card balances for everyday expenses. These payments directly impact your personal budget and are always included in your DTI calculation.
Business Debt: This is debt incurred exclusively for business purposes. Examples include Small Business Administration (SBA) loans, commercial real estate loans, equipment financing, and business lines of credit used for inventory or payroll.

The critical difference for a mortgage underwriter is not just the purpose of the loan but the source of repayment. A loan taken for the business but paid from your personal checking account will be treated as personal debt. To exclude it, you must prove it is paid directly and consistently from business revenue.

Comparing business and personal financial documents.

What Documents Do I Need to Prove a Debt is Paid by the Business?

To successfully exclude a business debt from your personal DTI, you need to provide clear, consistent, and indisputable evidence that the business is solely responsible for the payments. Vague assurances or a letter from your bookkeeper won't suffice. Lenders operate on strict guidelines and require specific documentation.

The most critical piece of evidence is a 12-month history of payments made directly from the business bank account. Here is the exact documentation you will need to gather:

12 Most Recent Business Bank Statements: These statements must clearly show the monthly payment being withdrawn from the business account. The transaction description should ideally name the creditor.
12 Corresponding Canceled Checks: If you pay by check, provide copies of the front and back of each canceled check for the past 12 consecutive months. This shows the check was written from the business account and cashed by the lender.
A Letter From Your CPA: While not a substitute for bank statements, a letter from a Certified Public Accountant can support your case. The letter should confirm that the debt is a legitimate business obligation and has been consistently serviced using business funds.
Business Tax Returns: Your business tax returns should show the interest paid on the loan as a business expense deduction, further cementing its status as a business liability. The data, information, or policy mentioned here may vary over time.

How Do Lenders Treat SBA, EIDL, and PPP Loans for Qualification?

The treatment of government-backed business loans like those from the SBA can vary depending on the specific program and the loan's status. Underwriters are particularly meticulous with these.

SBA 7(a) and 504 Loans

These are treated like standard business debts. If you have personally guaranteed the loan, it will appear on your credit report and be factored into your DTI by default. To exclude it, you must provide the standard 12 months of proof that the business has made every payment on time from its own accounts.

EIDL (Economic Injury Disaster Loans)

EIDL loans often face greater scrutiny. They almost always include a personal guarantee, and lenders may view them with extra caution due to their disaster-relief nature. While excluding the payment from your DTI is possible by providing the standard 12 months of payment proof from a business account, some lenders may have stricter requirements. Other strategies include paying the loan off before closing or having it subordinated by the SBA, which can be a lengthy process.

PPP (Paycheck Protection Program) Loans

PPP loans have a unique status.

If Forgiven: If your PPP loan has been officially forgiven by the SBA and you have the formal documentation to prove it, the debt can be completely excluded from your DTI calculation. It no longer exists as a liability.
If Not Forgiven: If the loan is still active and you are making payments, it is treated like any other business debt. You will need to satisfy the 12-month payment history rule to exclude the monthly payment from your personal DTI. The data, information, or policy mentioned here may vary over time.

Can I Exclude Debt if It Is on My Personal Credit Report?

Yes, absolutely. This is one of the most common misconceptions for self-employed borrowers. The presence of a business debt on your personal credit report does not automatically disqualify you or permanently lock it into your DTI ratio. In fact, for many small businesses, especially new LLCs or sole proprietorships, lenders require the owner to personally guarantee the debt, which causes it to be reported to personal credit bureaus.

The key is not its presence on your credit report, but rather the documented source of repayment. A mortgage underwriter's job is to verify your ability to handle the new housing payment. If you can prove with 12 months of business bank statements that your company has been making the $1,500 monthly payment on an equipment loan, the underwriter can disregard that payment when calculating your personal DTI.

For example, a marketing consultant might have a $75,000 business line of credit on her personal credit. To qualify for a jumbo loan, she provides her lender with the last 12 business bank statements showing the monthly interest payments being made directly from her S-Corp's checking account. The lender can then exclude this payment, significantly improving her DTI and increasing her borrowing power.

What Is the 12-Month Canceled Check Rule for Excluding Debt?

The '12-Month Canceled Check Rule' is the industry standard for excluding a personally guaranteed debt paid by a business. This is not a flexible guideline; for most lenders, it's a hard-and-fast rule derived from Fannie Mae and Freddie Mac underwriting standards that many lenders have adopted for risk management.

Why 12 Months?

This timeframe establishes a consistent and reliable payment history. It proves to the underwriter that the business has not only been making the payments but has also maintained sufficient cash flow to do so for a full year. A shorter period, like six or nine months, is usually insufficient as it doesn't demonstrate long-term stability. If you've only made 11 payments from the business account, the lender will almost certainly deny the exclusion and include the debt in your DTI.

What Qualifies as Proof?

Canceled Checks: The gold standard is providing copies of the front and back of the 12 most recent checks drawn from the business account and made payable to the creditor.
Business Bank Statements: If payments are made electronically via ACH or wire, the 12 most recent business bank statements showing the automated debits will suffice. The transaction details must clearly identify the recipient as the creditor.

Any commingling of funds, such as transferring money from a personal account to the business account just before the payment is due, will disqualify the exclusion. The data, information, or policy mentioned here may vary over time.

A business owner reviewing financial statements for a mortgage application.

Should I Pay Off a Business Loan Before Applying for a Mortgage?

Deciding whether to pay off a business loan before applying for a mortgage is a strategic choice with significant pros and cons.

Pros:

Simplicity: Paying off the debt completely removes it from your credit report and your DTI calculation. It's the cleanest and most straightforward solution, eliminating any need for documentation or underwriter scrutiny.
Certainty: You remove any risk of the underwriter denying your request to exclude the debt, which could derail your home purchase at the last minute.

Cons:

Depleted Cash Reserves: The primary drawback is reducing your liquidity. The cash used to pay off the loan is no longer available for your down payment, closing costs, or post-closing reserves, which are critical for loan approval.
Reduced Operating Capital: Draining cash from your business to pay off a loan could negatively impact its operations. Underwriters may also see a sudden, large cash withdrawal from the business as a red flag regarding its financial stability.

Recommendation: For a small loan, paying it off might be the simplest path if you have ample cash. For larger loans, proving 12 months of business payments is often the more financially sound strategy, as it preserves your capital for the home purchase itself.

How Does My Business Structure Affect Debt Calculation?

Your business's legal structure plays a significant role in how lenders initially view its debts. While the 12-month rule is the ultimate solution, your starting point differs based on your entity type.

Sole Proprietorship: There is no legal distinction between you and your business. All debt is considered personal by default. The burden of proof to separate a business debt is highest for sole proprietors. You will need meticulous documentation to exclude any debt.
Partnership/LLC: These structures offer a layer of separation. If the debt is in the LLC's name and you can provide the 12 months of statements from the business account, exclusion is straightforward. However, if you personally guaranteed the loan, the burden of proof falls back on you, and the 12-month rule becomes essential.
S-Corporation/C-Corporation: These entities provide the strongest legal separation between personal and business finances. Debt taken out in the corporation's name is clearly a business obligation. For an underwriter, a corporate loan is less of a concern than one for a sole proprietor. However, the personal guarantee remains the key factor. If you've guaranteed the loan, you must still provide the 12 months of payment proof to exclude it from your personal DTI. The data, information, or policy mentioned here may vary over time.

If you're a self-employed borrower in California struggling with DTI calculations, the rules can be complex. A strategic approach is key to ensuring business debts don't stand in the way of your homeownership goals. Reach out to discuss how to structure your finances and documentation to get your jumbo loan approved.

Navigating business debt for a mortgage application can be complex, but you don't have to do it alone. If you're ready to get a clear path to approval for your jumbo loan, take the next step and Apply now with our team of experts.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.