HOWDY!
I'm a complete newbie at securing a loan and just found this great site. Hope you can help clarify a few things.
My father has given me the house I grew up in: a modest 2-1-2 in an older neighborhood, currently appraised at $35,000. My attorney is currently preparing a conveyance deed at this time. It is a potential rental property (he has bought a home in a nearby town) but my stepbrother lives in it rent free for now (he just pays the taxes). It is understood that my stepbrother will move out whenever I want to convert it into a rental. I am a professional who took a hiatus from my profession (engineering) about 18 months ago. I wanted to go into the restaurant business but knew that it would be certain failure to jump right in without experience. My best friend has allowed me to manage one of his two restaurants (franchised sub shops) at which I have become rather good at. He (and his partner) have gotten offers to sell said restaurants at a good price. They are seriously contemplating them. His partner wants out due to health reasons. My friend and I are considering partnering up on another franchise: a coffee, smoothie and sandwich shop. We are completely in the planning phase so everything is still sketchy (ie no business plan yet). He would use money from the sale of his current shops and I would need to come up with money somewhere. My wife has a full time job (dental hygienist) and has been largely carrying us financially, as I make a meager wage. We live in a nicer part of town, in a $130,000 home which we currently owe about $100,000 (don't know if this will be relevent). I would need to secure about $50,000 for the venture.
My questions are (finally!):
(a) How can I use the older house as collateral for a loan to start this business? Would it be a "business" loan? Or a "personal" one? My intention is to rent the old house out to a paying tenant in order to repay the loan. What long term loan structures are available?
(b) Would the older house be enough collateral or would I need to use the newer house as well. For obvious reasons I would rather not use the house I currently reside in, if possible. Will the old house only bring in what it's worth? Or can I possibly get more than the value since it's paid for and a potential money maker?
( c) I have read your previous disclaimers about not being a residential loan expert, but in general, what is the difference between a home equity loan and a "line of credit" loan? Same thing? Can these loans be used for starting a business?
(d) Due to my lower income, our credit has become somewhat damaged (late payments). Is it a viable explanation to add to our credit report (I am in the process of ordering from the big 3) that I took a drastic cut in pay in order to get experience in the field in which I wish to start a business? Or would this be deemed as "just another excuse"?
(e) Might it be prudent to obtain a "real" job back in engineering temporarrily while my friends sale takes place (3-6 months potentially)? This would bring in more money which we currently need. Would it look better to a lender if I had a "real" job? Or would it appear that I'm jumping around from profession to profession? Is it preferable to run the franchise part time and keep a steady/stable income? Just trying to get all my ducks lined up to look as good as I possibly can.
Sorry for the long post. Let me know if more info is needed.
Thanks in advance for your help!
A
Full Version: Using Second Home as Collateral
Abel:
Thank you for noticing my prior disclaimers about not being a residential loan expert. I would also like to add another one in your case. I am not a small business credit analyst. As I have expressed in responses to other people, request under $250,000 don’t usually get the benefit of a full analysis. The ideas are the same, but it is usually a more automated process. There are small business loan underwriters, but that has not been really my area for a long time. Having said that and after pointing you in the direction of my disclaimer, lets see what direction I can send you towards with my educated guesses.
How can I use the older house as collateral for a loan to start this business? Would it be a "business" loan? Or a "personal" one? My intention is to rent the old house out to a paying tenant in order to repay the loan. What long term loan structures are available?
Without a business plan or some very specific information about the business to be acquired, it would have to be some sort of personal loan. I do not know the kind of loans available for a second house, but I would suspect that it would be limited to a percentage of the value of the house. Also you are approaching this from the point of view of one big loan. How about two small loans to get the $50,000. A lender might get thrown back at the idea of doing a loan secured by a first and a second mortgage, but approaching the lender as two separate facilities will be easier to understand. For the type of structures available you will need to talk to a local lender.
Note: You will have to show capability to repay the current mortgage and the new loans debt service. The lender might be concerned about the amount of debt you will be taking on. Also how about getting some sort of unsecured loan?
Would the older house be enough collateral or would I need to use the newer house as well. For obvious reasons I would rather not use the house I currently reside in, if possible. Will the old house only bring in what it's worth? Or can I possibly get more than the value since it's paid for and a potential money maker?
I doubt it very much that you could get a loan for more than appraised value. I doubt that you could get a loan for 100% of appraised value. Things are different depending on each market and each institution and strange things can and do happen. The bank doesn’t look at the potential money making ability of the property since it is not or ever would want to be in the business of running it.
what is the difference between a home equity loan and a "line of credit" loan? Same thing? Can these loans be used for starting a business?
A Home Equity Loan is a term-loan this means that you get all the money upfront and you amortize it down by paying equal payments during the life of the loan until it gets to $0. The line of credit is a commitment from the part of the bank that they will lend you up to the amount in the note and you can pay it as you wish. Usually in consumer lines of credit, the borrower must pay a small percentage of the amount outstanding each month along with the interest. In business lines of credit the most common structure is interest monthly and principal at maturity, but the business ones are usually only for a year.
Yes you can normally use the money from these loans as you please.
Due to my lower income, our credit has become somewhat damaged (late payments).
This could be very bad in your situation, since you are probably going to have to go with a consumer loan product. Consumer loans rely heavily ….. let me emphasize heavily on your credit report. After all, that is the one piece of information that tells them about your repayment history. A business loan is more forgiving since the analyst is only looking at the guarantor as a secondary or even tertiary source of repayment. {The business, which is the borrower, is always the first source}
Get those reports and get proactive in improving your score. This should be your priority go to creditboards.com for advice on this matter. I am not sure if that is the correct domain, but I have a link to their place in a couple of posts to visitors in my board.
Might it be prudent to obtain a "real" job back in engineering temporarrily while my friends sale takes place (3-6 months potentially)? This would bring in more money which we currently need. Would it look better to a lender if I had a "real" job? Or would it appear that I'm jumping around from profession to profession? Is it preferable to run the franchise part time and keep a steady/stable income? Just trying to get all my ducks lined up to look as good as I possibly can.
More money is always good
I guess it is all about timing. Having a job that pays twice what you are making now would look good from the point of view of a personal loan. However, the lender would have concerns about basing the loan on this income if you tell him that you need the money to buy a business and leave this job.
In conclusion: Start by checking your credit report and clean it up. Contact a local lender to see how much you can get out of the equity in the second home and discuss other avenues such as a second on your primary residence or some other type of facility.
I hope this helps.
Thank you for noticing my prior disclaimers about not being a residential loan expert. I would also like to add another one in your case. I am not a small business credit analyst. As I have expressed in responses to other people, request under $250,000 don’t usually get the benefit of a full analysis. The ideas are the same, but it is usually a more automated process. There are small business loan underwriters, but that has not been really my area for a long time. Having said that and after pointing you in the direction of my disclaimer, lets see what direction I can send you towards with my educated guesses.
How can I use the older house as collateral for a loan to start this business? Would it be a "business" loan? Or a "personal" one? My intention is to rent the old house out to a paying tenant in order to repay the loan. What long term loan structures are available?
Without a business plan or some very specific information about the business to be acquired, it would have to be some sort of personal loan. I do not know the kind of loans available for a second house, but I would suspect that it would be limited to a percentage of the value of the house. Also you are approaching this from the point of view of one big loan. How about two small loans to get the $50,000. A lender might get thrown back at the idea of doing a loan secured by a first and a second mortgage, but approaching the lender as two separate facilities will be easier to understand. For the type of structures available you will need to talk to a local lender.
Note: You will have to show capability to repay the current mortgage and the new loans debt service. The lender might be concerned about the amount of debt you will be taking on. Also how about getting some sort of unsecured loan?
Would the older house be enough collateral or would I need to use the newer house as well. For obvious reasons I would rather not use the house I currently reside in, if possible. Will the old house only bring in what it's worth? Or can I possibly get more than the value since it's paid for and a potential money maker?
I doubt it very much that you could get a loan for more than appraised value. I doubt that you could get a loan for 100% of appraised value. Things are different depending on each market and each institution and strange things can and do happen. The bank doesn’t look at the potential money making ability of the property since it is not or ever would want to be in the business of running it.
what is the difference between a home equity loan and a "line of credit" loan? Same thing? Can these loans be used for starting a business?
A Home Equity Loan is a term-loan this means that you get all the money upfront and you amortize it down by paying equal payments during the life of the loan until it gets to $0. The line of credit is a commitment from the part of the bank that they will lend you up to the amount in the note and you can pay it as you wish. Usually in consumer lines of credit, the borrower must pay a small percentage of the amount outstanding each month along with the interest. In business lines of credit the most common structure is interest monthly and principal at maturity, but the business ones are usually only for a year.
Yes you can normally use the money from these loans as you please.
Due to my lower income, our credit has become somewhat damaged (late payments).
This could be very bad in your situation, since you are probably going to have to go with a consumer loan product. Consumer loans rely heavily ….. let me emphasize heavily on your credit report. After all, that is the one piece of information that tells them about your repayment history. A business loan is more forgiving since the analyst is only looking at the guarantor as a secondary or even tertiary source of repayment. {The business, which is the borrower, is always the first source}
Get those reports and get proactive in improving your score. This should be your priority go to creditboards.com for advice on this matter. I am not sure if that is the correct domain, but I have a link to their place in a couple of posts to visitors in my board.
Might it be prudent to obtain a "real" job back in engineering temporarrily while my friends sale takes place (3-6 months potentially)? This would bring in more money which we currently need. Would it look better to a lender if I had a "real" job? Or would it appear that I'm jumping around from profession to profession? Is it preferable to run the franchise part time and keep a steady/stable income? Just trying to get all my ducks lined up to look as good as I possibly can.
More money is always good
I guess it is all about timing. Having a job that pays twice what you are making now would look good from the point of view of a personal loan. However, the lender would have concerns about basing the loan on this income if you tell him that you need the money to buy a business and leave this job. In conclusion: Start by checking your credit report and clean it up. Contact a local lender to see how much you can get out of the equity in the second home and discuss other avenues such as a second on your primary residence or some other type of facility.
I hope this helps.
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