Using HELOC to protect house against personal guarantee in California
October 02, 2023
by a searcher from Humboldt State University in Vacaville, CA, USA
Curious if anyone has done this before. At this weekends self funded search conference in Dallas various searchers mentioned the ability to protect our house from a personal guarantee required for an SBA Loan by taking out a HELOC on our house. What are your thoughts or experience?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Now, if you have a collateral shortfall on an SBA 7A loan based on the SBA collateral calculations, the Bank is required to try to take collateral in personal assets you have to shore up that shortfall. If you do not have collateral to take or sufficient collateral to support the loan, they will still make the loan, but they must take what collateral is available to help shore up the shortfall if you have any such collateral. Usually the most common place people have outside collateral and equity is in their residence. Under this situation the Bank takes a second or third mortgage on your home (depending on how many other mortgages you have), and if you own your home jointly with your spouse, your spouse is required to sign a limited guarantee to the pledge of the equity in the home and is required to sign the mortgage. If you default the Bank has your home as additional collateral they can immediately pursue liquidation on through foreclosure as it is directly pledged as additional collateral on the loan.
According to the SBA Standard Operating Procedure ("SOP") the SBA does not require the Bank to take additional collateral in other properties unless there is 25% or more equity in the property. So if your mortgage debt exceeds 75% of the value of the property, a lender is note required to take your home as additional collateral on the loan. However, even though it is not required that does not mean some lenders will not still require it. Lender's can always have more conservative underwriting criteria than the SBA SOP.
The amount of debt owed on your home is based on both current outstanding debt (your mortgage) and available debt via a second mortgage (like a home equity loan that is not fully drawn). So if these loans combined eat up more than 75% of the equity in your home, as a general rule your home is not required to be pledged as additional collateral. However, with that said, I have seen deals where there is a home equity loan with a $0 balance in place and a lender has required that loan to be closed so that they can take the equity in the home as additional collateral. So if you have a home equity loan in place, you should have a planned use for that money or even better, be using some of that money. With the new SBA SOP, if you plan to use equity in your home as a down payment on the purchase, you can do so. Usually if some of your equity is coming from your home via a home equity loan, that is a clear reason a Bank likely would not take your home as additional collateral.
Sorry this post is so long but I wanted to provide as clear and detailed an answer as I could as I know this concern comes up a lot. If you have additional questions I would be happy to answer them at redacted
in Tampa, FL, USA
I'm in Florida and I talked with a lawyer in the state who specializes in the law and even though it was if memory serves $400 for an hour consultation. It was more than worth it to be 100% sure what the law was for my particular situation.
Even if the banker says you should be okay... You should still consult a lawyer in your state because after talking with the lawyer - the bankers while technically correct in my situation - it could have led to some major issues down the line the way they wanted to structure things and how the homestead laws work in Florida.