Question: My husband and I are in our mid-20s and are interested in starting a business — and purchasing a home — within the next two to three years. We are wondering whether it makes sense to buy a home before or after starting the business. Would taking on a mortgage help or hurt us when we apply for small-business loans?
– Courtney Myers, Arlington, Va.
Answer: Qualifying for a start-up loan will probably be tricky no matter what you do. Many lenders are reluctant to finance new businesses without a financial track record in hand, and a sizable number of start-ups fail within a few years. So most start-up entrepreneurs resort to tapping home equity, taking loans from friends or family and maxing out credit cards.
That said, a mortgage may give you an edge when applying for loans as long as your credit rating is healthy and your mortgage payments don’t seem disproportionately big compared with your projected monthly income, says Jim Hammersley, head of the Small Business Administration’s loan programs division.
The most critical factor lenders consider when underwriting a loan is the likelihood of you paying them back. So if your credit history is rocky or monthly mortgage payments stretch your budget too thin, the lender will generally consider you too risky a bet.
But here is also where a mortgage can help: Many small-business lenders, including those offering loan guarantees through the SBA, request that borrowers put up collateral as a way to get paid back in case you renege on your loan obligations. Homes are typical forms of collateral that lenders look for, says Bill Morland, chapter chairman of the Orange County, Calif., SCORE, a volunteer group of retired executives loosely affiliated with the SBA. As a general rule, assuming that the home has equity, “that helps because there’s an asset,” Mr. Morland says. (And, yes, this does mean the lender can take your home if you can’t pay it back.)
If you do get the mortgage first, you are best waiting at least a year before applying for the business loan, suggests Rebecca Macieira-Kaufmann, head of the small-business unit for Wells Fargo & Co. The reason is that too many credit inquiries and new loans too close together can temporarily bruise a credit score. And because it will give you time to prove to lenders you can handle your debt payments.
By Kelly Spors
From The Wall Street Journal Online
