Can You Buy a House With a Business Loan? Everything You Need to Know

If you own a business, you may be wondering if you can use a business loan to buy a house While it is possible in some cases, there are pros and cons to weigh when using business financing for a personal real estate purchase In this comprehensive guide, we’ll cover everything you need to know about buying a house with a business loan.

What is a Business Loan?

A business loan is financing offered by a lender specifically for business purposes. There are many types of business loans, including

• Term loans – Issued for a set amount and repayment term. This is the most common type of small business loan.
• Lines of credit – Provide access to revolving credit up to a set limit. Only pay interest on what you use.
• Equipment financing – Funding to purchase business equipment and machinery.
• Invoice financing – Using unpaid invoices as collateral to obtain a cash advance.
• SBA loans – Government-backed loans with favorable terms for qualifying small businesses.

Business loans generally require a good business and personal credit score, sufficient income/revenue, and collateral. Rates vary by lender but are often higher than consumer lending rates.

Can You Buy a House With a Business Loan?

Yes, it is possible to use a business loan to purchase a residential property in some cases. However, there are important factors to consider:

• Intended property use – Lenders may only approve a business loan for a property used for business purposes, such as a rental property or office building. Using a business loan for a primary residence is difficult.

• Down payment requirements – Business loans often require a down payment of 20-30% or more. You’ll need funds on hand to meet this requirement.

• Higher interest rates – Expect to pay a higher interest rate compared to a traditional mortgage. The exact rate depends on your business, credit profile, collateral, and other factors.

• Shorter repayment terms – Business loans usually have repayment terms of 1-7 years. This results in higher monthly payments than a traditional 30-year mortgage.

• Prepayment penalties – Many business loans charge fees for early repayment. Carefully review the loan terms.

• Collateral required – The lender will place a lien on the purchased property until the loan is fully repaid. Your business assets may also be required as collateral.

As you can see, using a business loan to buy a house can be more costly and come with stricter terms compared to traditional mortgages. However, it provides an alternative option if you need funding quickly and can meet the loan requirements.

What Types of Business Loans Can Finance a Home Purchase?

If you’ve decided to move forward with a business loan to buy a house, the most common options include:

SBA 7(a) Loans

This popular Small Business Administration loan guarantee program can provide up to $5 million in funding for qualifying businesses. Due to the government guarantee, 7(a) loans offer lower interest rates and longer repayment terms than conventional business loans. The funding can be used to purchase owner-occupied real estate.

Commercial Real Estate Loans

Also known as CRE loans, these are specifically designed for financing residential and commercial property purchases. CRE loans are issued at higher amounts with rates based on the property type, location, and other factors. The property must be used for business purposes.

Equipment Loans

Since real estate is classified as equipment, some equipment lenders will finance owner-occupied property purchases. This option usually comes with higher rates and shorter 3-5 year repayment terms.

Business Lines of Credit

Banks may approve a business line of credit for a down payment on a mortgage since real estate is an approved use of funds. Compared to other business loans, lines of credit offer flexibility with interest-only payments.

Alternative Business Loans

Online alternative lenders provide faster approvals and funding than traditional banks. However, alternative business loans come with high rates and strict repayment terms. Use only as a last resort.

Talk to a few lenders to find the best business loan option for your specific situation. A small business banker can explain the pros and cons of each product.

What Are the Qualifications to Buy a House with a Business Loan?

Meeting the typical eligibility criteria is key to getting approved for a business real estate loan:

• 2+ years in business – Most lenders require at least two years of successful business operations and financial statements.

• 680+ personal credit score – Your personal credit record plays a role in approval, even if getting a business loan.

• Debt-to-income ratio below 50% – Lenders look at your total personal and business monthly obligations compared to income.

• 20%+ down payment – Putting at least 20% down shows you’re financially invested in the property.

• Profitable business – Underwriters analyze your income statements, balance sheets, and cash flow looking for consistent profits.

• Strong collateral – Expect to put up business assets and the subject property as collateral.

Come prepared with all required documentation so your business loan application is reviewed efficiently. Having an established successful business is key.

What Are the Pros and Cons of Buying a House with a Business Loan?

Before committing to finance a home purchase with business borrowing, think through these potential advantages and drawbacks:

Pros

• Quicker approvals and funding than traditional mortgages
• Alternative when you don’t qualify for a standard home loan
• All-in-one loan for down payment and closing costs
• Interest may be tax deductible as a business expense

Cons

• Higher interest rates and fees than mortgages
• Large down payment usually required
• Shorter repayment terms with higher monthly payments
• Inflexible prepayment penalties
• Risk losing business assets and house if default

As with any major financing decision, it’s critical to run the numbers and assess both the quantitative and qualitative factors. Make sure you’re comfortable with the stricter terms and higher costs that come with using business financing.

Tips for Getting a Business Loan to Buy a House

If you understand the risks and still want to obtain a business loan for a residential purchase, here are some tips to boost your chances of getting approved:

• Pay down existing debts to lower your DTI ratio
• Build up cash reserves in your business bank account
• Put off the purchase until you have 2+ years of financial statements
• Shop with an SBA preferred lender for better 7(a) loan rates
• Bring an large down payment of 25% or more
• Pick a property below your affordable price range
• Select a shorter loan term such as 5-10 years
• Offer additional business collateral beyond the subject property
• Get quotes from multiple lenders to compare loan options

The bottom line is lenders want to see you can comfortably handle the higher costs and accelerated repayment terms associated with a business loan.

Alternatives to Pay for a Home Without a Mortgage

If you don’t want to take on the risks and stricter terms of a business loan, here are a few alternatives to get the funds needed to buy a house:

• Save up and pay cash – The most cost-effective option with no monthly payments. However, it requires major discipline and time to accumulate funds.

• Use a 401(k) or IRA loan – Lets you borrow against your own retirement savings and pay yourself back with interest. This avoids tapping retirement funds.

• Take out a personal loan – An unsecured or home equity loan will have lower rates than business borrowing options.

• Get a cosigner – Adding a cosigner with better credit may help you qualify for a competitive mortgage.

• Sell assets – Liquidate existing real estate, investments, or other holdings to come up with a larger down payment.

Run the numbers on these alternatives to see if they make sense for your financial situation. The best funding option depends on your business revenue, personal savings, credit rating, and overall finances.

The Bottom Line

At the end of the day, borrowing money from your business to purchase a house carries more risks and higher costs compared to traditional mortgage financing. But in some circumstances, it may be the only or best route available based on your financial profile. Carefully assess both the pros and cons before moving forward with a business cash-out loan for a major personal real estate purchase.