Home Equity Loans and Lines of Credit for Business - Everything You Should Know

Last Updated: July 12, 2021

It is not unusual to face obstacles when financing your company. Opening a new company or missing out on business credit, for instance, are some of the obstacles that could keep you from getting additional funding for your company. If you're experiencing this problem, where are you going to turn?

Perhaps, you might approach alternative loan providers with minimal loan conditions, but short repayment periods, extra fees, and high-interest rates might place a financial strain on your company. Instead of opting for unfavorable alternatives, be creative —use a home equity loan for your company.

If you own your house, you can use it as collateral to obtain a loan using home equity. With a home equity loan, you will be able to access an adjustable line of credit that can be employed for any business objective, from start-up costs to expansion. This article explores everything you should know before getting a loan using home equity for your company.

What's the Loan using home equity?

This is a form of credit given on the basis of the value of equity in your house. Basically, this is a second mortgage that allows you immediate access to funds paid back over a set period. When you have been accepted for a loan using home equity, you will be eligible to take out a loan up to the amount allocated to you by your loan provider during the draw duration.

When the draw time ends, you move to the repayment phase. During this period, you will not be able to borrow from your line of credit but instead will start repaying the loan on the basis of the terms specified by the loan provider. Usually, installments are made monthly and are calculated based on the borrowed amount and the lender's interest rate.

Interest charged on home equity loans is usually flexible, and they have a maturity period of up to 20 years. When you finish repaying the loan, your line of credit will be ready to be used again.

Who Qualifies For A Loan using home equity?

Not every individual who applies for a second mortgage gets approved. There are specific criteria that you must comply with to be eligible for a loan using home equity. The most apparent criterion is that you have to own your house. Your house acts as security. Therefore if you don't own a house, you should consider other forms of business financing.

On top of owning a house, you must still have adequate equity for you to be eligible for a loan using home equity. The value of equity you require differs from one loan provider to another, but the majority need you to have 15-20 percent equity. Equity is created by paying off the initial home loan or if your home's value rises significantly.

Getting equity in your house alone is not enough to get approved for a loan using home equity. You also need to have a good credit profile. You require at least a fair credit rating to be eligible for a loan using home equity. Like every financial product, lenders with the best credit ratings will get the lowest interest rates and favorable terms. If you have low or fair credit ratings, you may experience higher interest rates and be required to have more equity in your property than lenders with good credit ratings.

Another factor that loan providers use in the acceptance process is the debt to income ratio. Loan providers want to work with lenders who can afford to repay the loans borrowed. If you have a high debt to income ratio, you are viewed as a risky lender. Therefore you have to maintain a low debt to income percentage.

Finally, you have to be ready to incur the upfront expenses of a loan using home equity. Loan expenses may include appraisals, lawyer fees, and application fees.

Advantages and Disadvantages of HELOC

Now that you have a clear idea of getting a loan using home equity, how it can support your company, and what you require to be eligible. If you are still unsure about applying for one, weigh these advantages and disadvantages before coming to a decision.

How to Obtain a Home Equity Loan for Business Reasons

If your own house with adequate equity and a home equity loan sounds suitable for your company, here are the next moves you need to make to get your lines of credit.

Assess and reduce the debt to income percentage

To assess your debt to income ratio, divide your unpaid monthly debt by your gross income in the month. If you have a high debt to income ratio, there are two methods of lowering it. First, you can minimize your debts by paying down balances to minimize your amount of debt.

The other method of minimizing your debt to income percentage is by increasing your earnings. Even though your debts will stay the same, increased earnings will help reduce your debt to income ratio to a score that you can qualify for a loan using home equity.

Compare Loan Providers

Although applying for a loan using home equity can be time-consuming, do not fail to research and consult multiple lenders. Your aim is not just to obtain the funds you require for your company but also to choose the most affordable alternative on the most favorable terms.

Begin with a loan provider you have worked with before as they may provide discounted prices for existing clients. This includes the provider of your first mortgage and other financial institutions where you have accounts. Nevertheless, you should not stop there; evaluate all available lenders so that you find the best terms and rates.

Getting a loan using home equity is a great way to get the extra funds you require to start or expand your company. Like any other type of loan, shop around your alternatives, compare loan providers and comprehend the loan terms before signing the loan agreement.


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