HELOC for SBA Loans?

searcher profile

July 25, 2024

by a searcher from Cabrini College in Eagleville, PA, USA

I’ve read anecdotally that taking out a HELOC on a secondary home (maybe even primary?), prior to closing on an SBA loan can help shield some assets. Is there any validity to this or does anyone have any clarity as to the logic of why this would be the case, if true? Thanks for any help!

1
13
149
Replies
13
commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I concur with Hallam. If you get a home equity loan, whether you draw the balance or not and it is just available, and you reduce the available equity in your home below 25%, then the SBA does not require a lender to take your home as additional collateral. However, some lenders may still require a lien on the home even if the equity is less than 25%. That is a lender choice at that point.

If you own other investment properties, only if they are wholly owned by you and your spouse (even if held in a third party entity like an LLC or trust), if they have more than 25% equity, the SBA would require them to be pledged as well if there is still a collateral shortfall after pledging your home. If you own investment properties with another investor that is not involved in the loan and is not your spouse, then the SBA cannot require those properties to be pledged. it is true that few lenders will offer home equity loans on investment properties. Some community banks will, but they can be hard to find.

If you have additional questions about collateral requirements or the pledging of assets on SBA 7A loans, you can reach me here or directly at redacted
commentor profile
Reply by a professional
from University of Michigan in Detroit, MI, USA
Hi ^redacted‌, there is truth to this. If you have 25% or more equity in your home and there is a collateral shortfall, your SBA lender is required to have you pledge your home as additional collateral (unless you live in Texas due to the state's homestead law). A HELOC can consume the equity in your home, even if not drawn, nullifying this requirement.

But note: Your lender may still want to take your home as additional collateral. There is nothing to stop them, even if the SBA rules don't require it. So make sure you are open with your lender ahead of time if you do not want them to do so.
commentor profile
+11 more replies.
Join the discussion