SBA’s New Rules for House Collateral
SBA’s New Rules for House Collateral
As a financial advisor seeking an SBA 7(a) loan to grow your RIA or IBD practice, you might worry about putting your home on the line. The SBA’s updated rules in SOP 50 10 8 (effective June 1, 2025) lower the loan threshold for potential house collateral from $500,000 to $350,000, tightening requirements.
Essentially, for loans over $350,000, if you are a 20%+ guarantor the SBA requires the bank to lien any personal property (like a house) having 25% equity up to the full loan amount if available. If you do not have 25% equity in personal property then no lien is required. But if you’re doing a $1 million loan and have two properties with 25% equity in each with one at $200,000 and the other at $100,000 then the bank will lien both properties. The biggest change to the personal property rule is the SBA dropped the threshold from a $500,000 loan amount down to $350,000 (this moves it back to where it always was was prior to the change made about 2 years ago.
Let’s break down the current requirements.
Personal Property Lien Potential for Loans >$350,000
Personal Real Estate Collateral: If business assets don’t fully secure the loan, which they never do for advisors, lenders must take liens on personal real estate (residential or investment) owned by borrower9s) with 20%+ direct/indirect ownership and who have 25% or more equity in the property (appraised value minus outstanding liens). Liens are capped at 150% of the collateral shortfall and are mandatory for properties meeting the 25% equity threshold.
Equity Calculation: Equity = Appraised value – Outstanding liens. For example, a $600,000 home with a $420,000 mortgage has $180,000 equity (30%), triggering a lien.
Appraisal Requirement: Commercial real estate collateral needs an independent, USPAP-compliant appraisal by a state-licensed or certified appraiser (certified for >$1M properties) within 12 months of the loan application. Residential properties typically don’t require appraisals unless the lender deems it necessary.
Less Than 25% Equity: Properties with under 25% equity are exempt from mandatory liens, though lenders may opt to include them, documenting equity sources in the loan file.
Example: For a $400,000 7(a) loan to acquire a book of business, your practice’s assets ($250,000 adjusted value) and a second lien on your home with 30% equity ($150,000) cover the shortfall. A rental property with 10% equity ($50,000) isn’t required unless the lender chooses to include it.
Mitigating Collateral with HELOCs
A Home Equity Line of Credit (HELOC) can reduce your home’s equity below 25%.
25% Equity Rule: For 7(a) loans >$350,000, personal real estate with 25%+ equity owned by 20%+ owners must be collateral if business assets fall short. A HELOC counts as a lien, lowering equity.
How It Works: A HELOC creates a second lien behind your mortgage. The SBA lender takes a third lien (if mortgage and HELOC exist) or second lien (mortgage only). Dropping equity below 25% (e.g., from 30% to 15%) exempts the home from mandatory collateral.
Mandatory Lien: If equity is 25%+, lenders must take a lien up to 150% of the shortfall, with no discretion to waive unless equity is below 25%.
Example: Your $500,000 home has a $350,000 mortgage ($150,000 equity, 30%). A $75,000 HELOC cuts equity to $75,000 (15%), avoiding a lien for a $400,000 loan.
Selling a Collateralized Property
Selling a home with an SBA lien means working with your lender to release it and handle proceeds.
Process: Notify your SBA lender of the sale. The primary mortgage and any HELOC are paid first. Remaining equity is escrowed or applied to the SBA loan balance. Options include:
Replacement Property: Use escrowed equity for a new home, with the bank taking a lien on it, subject to lender approval.
SBA Loan Reduction: Apply equity to reduce your SBA loan principal.
Example: You sell a collateralized $500,000 home, paying a $350,000 mortgage. The $150,000 equity is escrowed. Buying a $400,000 home, you apply the $150,000, and the bank liens the new property. Otherwise, it can be applied to your SBA loan balance.
Lien Impacts on Future Financing
An SBA lien on your home affects future options but doesn’t lock you out.
Refinancing:
You can refinance to lower rates, but cash-out refinances are limited to protect the SBA’s lien. Lenders approve refinancing to maintain collateral value.HELOCs:
Existing HELOCs: Stay accessible post-loan.
New HELOCs: Not banned by SBA but may be restricted by lender agreements. Check before pursuing.
Using Securities Instead of Your Home
Securities can sometimes replace home collateral, depending on lender flexibility.
Securities as Collateral: Marketable securities (e.g., stocks, bonds) or whole life insurance cash value can substitute if liquid and verifiable, per lender standards. They don’t need to cover the full loan but must significantly secure it.
Conditions: Lenders prioritize business assets (e.g., 85% for real estate, 50% for equipment) and 25%+ equity real estate. Securities are considered if these are insufficient or you negotiate to avoid a home lien, subject to approval.
AdvisorLoans is Ready to Help
We deliver independent lending advice we believe serves the best interests of the advisors we work with. Our consulting is relaxed, unbiased, and straight-up candid. We’ll give you an instant read on your loan request’s viability, highlight any workarounds or red flags, and ensure the loan aligns with your strategic goals or future financing plans. We can help you compare SBA and conventional options, address equity injections, and share the best solution for your goals.
Over the past five years, AdvisorLoans has originated one-third of all SBA-funded dollars for advisors in wealth management, Live Oak Bank has originated one-third, and over 150 banks together have the other third. Whether you need an SBA loan now or want to craft a financing strategy around the unique opportunities SBA lending offers advisors, give us a call today.