Will an MCA Default Prevent Mortgage Approval? Questions for the Actual Application

Not automatically. Whether it stops you from getting a home loan depends on its nature and status, as well as your other credit and financial factors. Essentially, whether a merchant cash advance is going to hurt you individually depends on whether you personally guaranteed the merchant cash advance. A personal guarantee simply means that you promise you will repay the loan yourself, using your personal assets if necessary.

Your Personal Guarantee Created a Judgment

While a debt may not have started out that way, it can become personal. You can see whether you were required to give a personal guarantee or not in the contract you signed with the merchant cash advance funder. In an FTC case against the merchant cash advance company RCG Advances, for instance, a federal judge ruled that RCG did require business owners to give personal guarantees. Some also signed confessions of judgment holding them liable as individuals. If you signed one, the creditor would then hold a judgment against the business and you as an individual, and that can make it much harder for you to get approved for a mortgage.

Lenders don’t generally like approving mortgage loans when a person has a judgment against them that hasn’t been paid off. So if your personal guarantee created a judgment that hasn’t been paid off or settled, your mortgage will likely not close before you solve this issue. For instance, Fannie Mae requires judgments, tax liens and liens that could affect its lien position to be paid off prior to closing.

However, it’s not always that clear cut. For example, if you are paying it off on a payment plan, that can serve to reassure a lender. FHA rules allow a judgment to still be outstanding so long as you have a payment agreement with the creditor and have made at least three on-time monthly payments prior to credit approval. Smaller debts aren’t automatically show-stoppers. For Fannie Mae loans underwritten manually, non-medical collections and non-mortgage charge-offs need not be paid off if they total $1,000 or less combined. Whichever avenue you take to make your merchant cash advance situation more palatable to a lender, you’ll need to be able to provide documentation that this work has taken place.

When you apply, the standard application (Form 1003) asks whether you are a guarantor or co-signer on any debt not shown elsewhere on the application. A personal guarantee for a merchant cash advance fits this scenario, and some might try to leave it off, which would make it a false statement. Hiding that could be seen as misrepresentation, and that’s a criminal offense with a potential prison sentence of up to 30 years. The same form asks specific questions about any judgments, and there’s a question on the form that asks if you are a party to any lawsuit.

Debt-to-income (DTI) Ratio

Any payments you’re making, monthly or otherwise, to a merchant cash advance lender may count as a debt and against your debt-to-income (DTI) ratio. Business debt for which you’re personally liable doesn’t get a pass, either, unless it’s all three of these combined: You’ve never been late with a payment, the business itself makes the payments on your behalf, and your underwriter factored the debt into a cash-flow analysis of your business. For defaulted debts, you fail the first test immediately. If your total monthly debt payments exceed the recommended percentage of your monthly income, you may have trouble getting approved unless you make other changes. For loans run through Fannie Mae’s Desktop Underwriter, the max DTI is 50%.

If you own 25% or more of a company, then you’re technically self-employed as a borrower. As such, your underwriter will look over two years’ worth of your personal tax returns, along with the business’s financial strength and its capacity to keep making income that will pay you. The company’s debt load factors in as well. For mortgages sold to Fannie Mae, underwriters evaluate self-employed borrowers through a cash flow analysis and a trend analysis that considers how well the business has been performing financially year by year, looking at gross income, expenses and taxable income and also comparing the business to others in the same industry. In turn, if the business has trouble making money, you might, as well. Before agreeing to let you use business money to cover a down payment or closing costs, a lender will run a cash-flow analysis on the business to confirm that removing the cash won’t hurt its financials. They may also want to see copies of months of recent business bank statements or a current balance sheet.

If your merchant cash advance goes badly enough, you might end up declaring bankruptcy. Fannie Mae generally requires waiting until four years pass from the discharge date of a Chapter 7 bankruptcy or dismissal. If you end up losing a home to foreclosure due to the personal guarantee, this can make getting a new home loan harder as well. You’ll have to wait until the end of a certain waiting period after foreclosure, which under Fannie Mae’s standard rule is seven years from completion.

Get Things in Order Before You Apply for a Mortgage

Ideally, if you are having credit problems, you will have time to get things in order before you apply for a mortgage. What you do to clean things up and boost your chances of mortgage success will depend on your specific circumstances. In advance of applying for a mortgage, plan to dig up any and all documentation you have about your merchant cash advance, and whether a personal guarantee was taken. This includes the agreement and related documents that you signed with the MCA provider. Then look for anything that came back at you - either from the MCA provider, a debt collector or perhaps even a court - and forward them to your loan officer. If it did come to a judgment, you should look into resolving it through a payment plan, settlement or payoff, or whatever makes the creditor happy, prior to trying to secure a mortgage. You can contact the merchant cash advance company directly, or if there is a collector after you, take that route instead.