Can you use an SBA loan to buy a house?

Real estate has long been one of the best investments someone can make. Whether you purchase a home to live in and hope it appreciates in value or you buy a property with the intention of renting it out and earning income, real estate offers opportunities for all kinds of investors.

But what if you want to buy a house as an investment property for your business? Are you restricted to regular home buying loans? Or can you buy a home with a Small Business Administration (SBA) loan? And what about using an SBA loan to buy yourself a place to live?

You can buy property with an SBA loan, but there are some considerations you should note before purchasing with this type of financing. First and foremost, you can’t buy a home in the traditional sense. In this piece, we’ll explain the SBA loan options available to business owners who want to purchase houses for their businesses, and the pros and cons of using an SBA loan to buy a house.

What is an SBA loan?

SBA loans are small business loans that are partially guaranteed by the United States Small Business Administration. These loans have high qualification standards, but tend to offer flexible terms and low interest rates — making them popular options for businesses looking for an influx of capital.

You cannot buy rental or investment properties with any SBA loan. But if you’re looking to buy office or commercial space for your business, there are two primary SBA loan options available to you. SBA 504 loans are specifically designed to finance real estate and other fixed assets, while the 7(a) loan serves more general purposes. 

What is an SBA 504 loan?

The SBA 504 loan is specifically designed to help small businesses expand by purchasing fixed assets like real estate. A secondary goal, however, is to spur community development and job creation, so if your business applies for an SBA 504 loan to buy a single-family home you plan to use as an office space, the bank may not agree with your eligibility.

SBA 504 loans feature low, fixed interest rates, long-term financing, and small down payments. These factors make them especially attractive for small businesses looking to acquire commercial property. To get an SBA 504 loan, you’ll work with an SBA-approved certified development company (CDC) and a bank to figure out loan terms. In most cases, the bank provides 50% of the total funding for a loan, while the CDC provides 40% and you pay 10% as a down payment for the loan.

SBA 504 loan rates and terms

SBA 504 loans usually range anywhere from $50,000 to more than $20 million. The CDC portion of the loan maxes out at $5.5 million. On real estate loans, SBA 504 loans have 20- or 25-year repayment terms.

Because both the CDC and the bank guarantee different portions of the loan, SBA 504 loans carry two different interest rates. The portion of the loan that the CDC guarantees will have a fixed interest rate that doesn’t fluctuate with the market. The interest rate on the bank portion of the loan, however, may fluctuate with the market over the life of the loan. That can increase fees later on.

How can you use an SBA 504 loan?

While applicants often use SBA 504 loans for real estate, they can be used for anything that falls under a “property, plant, and equipment” umbrella. So, some of the eligible uses include:

• Purchasing existing buildings.
• Purchasing land and land improvements, like street improvements, parking lots, utilities, and landscaping.
• Constructing new facilities or modernizing, renovating, or converting existing ones.
• Purchasing equipment with a service life of 10 years or more.
• Refinancing conventional debt in connection with expanding the business through property acquisition or renovation.

Again, these loans are designed with active development in mind. The SBA wants you to use these loans to create jobs, so you’ll face scrutiny when applying for a loan to finance a property purchase.

How to qualify for an SBA 504 loan

To qualify for an SBA 504 loan, you must first meet the minimum expectations:

• Operating a for-profit company with a tangible net worth less than $15 million.
• Company average net income must be less than $5 million after taxes for the previous two years.
• Operating in the United States.
• Able to repay the loan from your projected operating cash flow and provide the SBA with a personal history from all principals in your company.
• You must have proof of management expertise, a feasible business plan, and demonstrate that the money will help you create jobs or meet other public policy goals.
• Finally, at least 51% of the acquired real estate must be used by the business, or 60% for newly constructed buildings.

If you and your project meet these criteria, you can apply for an SBA 504 loan through an approved lender or a CDC, each of which may have additional eligibility requirements.

What is an SBA 7(a) loan?

The other option to get an SBA real estate loan is through the SBA 7(a) loan program. SBA 7(a) loans are for more general funding purposes, usable for a wide range of business needs.

Like all SBA loans, the 7(a) loan program prohibits any loan funds from being used for an investment property like an apartment complex, homes with tenants, or multifamily and single-family homes.

These loans have simpler structures than a 504 loan and less stringent eligibility requirements. There is no CDC involved so you’ll work directly with a bank or other private lender on an SBA 7(a) loan.

SBA 7(a) loan rates and terms

The SBA 7(a) loan program offers a maximum loan of $5 million. While there is no official minimum, most lenders shy away from small loan amounts. In 2021, the average 7(a) loan amount was $704,581.

If a 7(a) loan is used for a real estate purchase, the repayment term is a maximum of 25 years. Interest rates tend to range from 7% to 9.5% but are subject to economic fluctuations. They will also require a down payment of anywhere from 10% to 20%.

How can you use an SBA 7(a) loan?

You can use SBA 7(a) loan funds for a lot, including real estate. You can earmark this capital for everything from purchasing land or property to meeting everyday operating costs. Some of the most common uses include:

• Expanding, acquiring, or starting a business.
• Purchasing or constructing real estate.
• Refinancing existing business debt.
• Purchasing equipment.
• Acquiring everyday operational capital.
• Purchasing inventory.

Again, you cannot use the funds to purchase an investment property, but you could use them to make changes to property you already own or buy a commercial property for your business to actively use.

How to qualify for an SBA 7(a) loan

Qualifying for an SBA 7(a) loan is easier than qualifying for an SBA 504 loan. The base requirements are minimal and include:

• Business owners must have a personal credit score of at least 650.
• Business owners must have at least two years in business and a history of profitability.
• Business must meet the SBA’s definition of small, which varies based on industry.
• Any real estate financed with the 7(a) loan must be at least 51% owner-occupied.

Considering the more lenient eligibility requirements and oversight of funds, SBA 7(a) loans are easier to get, making them a better choice for most small business owners looking to use SBA capital to purchase real estate.

You cannot use an SBA loan to buy yourself a house. When it comes to real estate, SBA loans can only support the purchase of property to be used by the business. Banks don’t approve many small SBA loans and the rules stipulate your business must utilize at least half of any acquired real estate. Most business owners don’t want to buy a rental investment property only to be restricted to renting out less than half of it. So, before you apply for an SBA loan to finance a real estate acquisition, make sure the juice is worth the squeeze.