Trying to avoid putting a lien on my house for an SBA loan

June 03, 2024

by a searcher from Centre College in Denver, CO, USA

Does net worth, amount of liquidity, etc. play any role in an SBA lender putting a lien on your house, etc. for a loan? Is there any way around them putting a lien on your house (a smaller loan, etc.)?

If not, does anyone have any recommendations for other types of loans to finance a small business acquisition?

1 Like

15 Replies

217 Views

Replies

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

There seems to be some confusion out here about the percentage. Just to be clear, if you have 25% or more equity (not 20%-20% refers to any guarantor with a 20% or greater ownership in the business - not the amount of equity in the home) and there is deemed to be a collateral shortfall based on SBA underwriting criteria, then you are required by the SBA rules to pledge your home as additional collateral (unless you live in Texas where you are protected by Texas Homestead Laws. That is why we recommend having a home equity to eat up the equity in your home. Even if not drawn, a home equity does count against the available equity in your home. Although the SBA rule states 25% or more, even if you have less equity it is still possible a lender might want to take your home as additional collateral anyway. That is why it is important to note up front you do not plan to pledge your home as additional collateral on the loan. Below is the specific language from the SBA SOP for reference to clear up any confusion.

ii. If there is a collateral shortfall (not “fully secured”) on the SBA-guaranteed loan the Lender: a) Must take available equity in the personal real estate (residential and investment property, including other commercial real estate) of any owners of 20% or more of the Applicant and guarantors except Supplemental Guarantors. Liens on personal real estate may be limited to the amount of the collateral shortfall. In addition, liens on personal real estate may be limited to 150% of the equity in the collateral. b) May include trading assets as necessary (using no more than 10% of current book value for the calculation). iii. SBA does not require a Lender to collateralize a loan with real estate (including commercial, residential and investment properties owned by the Applicant or personally by the owners) to meet the “fully secured” definition when the equity in the real estate is less than 25% of the property’s fair market value. The Lender must document in their loan file the source (other than the personal financial statement) for making the determination of less than 25% equity.

Reply by a lender
in Stuart, FL, USA

Keep in mind when people suggest they can't place a lien on the House unless there's X amount of equity in it is not a black and white thing. There is always lender discretion. I've literally seen lenders put 5k and 6k liens on people's homes for nothing more than psychological purposes. It's their money, they can do whatever they want. I've also seen lenders collateralize double the amount required for the collateral shortfall of the loan to make a deal happen. The typical guidelines state that any loan over 500,000, the lenders are required to place a lien on all available collateral. That doesn't mean just property. Most lenders will take the value of the house at 85% and subtract whatever underlying mortgage(s) there are. Whatever the remaining balance is, is usually what they place a lien on the House for. That is the lender’s standard M.O. But it doesn't always happen that way. As mentioned in the comments some people may suggest the borrower place a HELOC on their own property so there is not enough collateral in the lender’s eyes to place a lien on the home. While this may work sometimes there are other times when the lender would rather have the collateral due to the risk in the deal. I have seen more than a handful of times when the lender mandates the buyer close out the HELOC. I've said this before there is no one-size-fits-all in SBA lending, every deal must be looked at on its own merit. There are a couple other workarounds when it comes to no lien on the property. E-mail me personally if you want to know the workarounds. I really don't want to put some of these techniques out on this board because they will turn into the rule instead of the exception which will only make lending harder. To Jeff's point, there is a ton of misinformation being shared on this board. My email is redacted

+13 more replies.

Join the discussion