Just a few years ago, home equity loans were one of the easiest ways to finance a business. Home values were high and lender requirements were lax. That changed dramatically when the housing boom turned to bust. With less equity and much more stringent underwriting by lenders it’s harder to turn your equity into start-up capital.
But these loans haven’t gone away entirely. Seventeen percent of businesses with less than $100,000 in sales use home equity lines of credit for business purposes, according to Barlow Research’s Small Office/Home Office Opportunity study.
There are several ways to use home equity to borrow for your business:
- A home equity loan or line of credit
- Refinance your current mortgage for more than you owe, and take cash out for your business
- Pledge home equity as part of an SBA loan or other small business loan
As mentioned, it is much harder to qualify for mortgages, including home equity loans, than it was prior to the housing downturn. You’ll generally only be able to borrow up to 80% of your home’s appraised value, minus any first mortgage.
The Importance of a Personal Credit Score
Your personal credit score will be a key factor in determining which program you qualify for, and the rate you’ll pay. Make sure you check your credit reports at AnnualCreditReport.com at least six weeks before applying for one of these loans, to give yourself time to fix mistakes. While you’re at it, check your credit score for free at Credit.com to get an understanding of where you stand or at Creditera to get a free business and personal credit score summary and score. No credit card required. Keep in mind, though, that for mortgage applications, lenders use a specific version of the FICO score which they will obtain with your credit reports from each of the three major credit bureaus. The middle of the three scores that are returned will usually be used for qualification purposes.
Don’t quit your day job just yet! If you are still working a full-time job, apply for a home equity loan or line of credit while you can still show steady employment. Lenders want to see two years of documented income, and it’s become more challenging for those who are self-employed to get these loans. Unless your spouse can qualify for the loan on his or her income and credit score alone, it’s best to get a loan nailed down before go out on your own. For more information check out my book Finance Your Own Business: Get on the Financial Fast Track.
Learn More About Business Lines of Credit
Our upcoming book Finance Your Own Business: Get On The Financing Fast Track details the power of business credit, how to get an SBA loan, the secrets of micro lenders, the benefits of crowdfunding and more.
Fill out the form on this page and we will let you know when the new book is released and offer early bird discounts. Plus you’ll get a free guide today – The Levels of Business Credit. (And don’t worry: we know you’re busy so we won’t flood you with email.)
About the Authors
Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.
Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.
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