Because it’s often difficult to get one for small business owners, many hesitate to apply for a mortgage, even as their home-based business grows and even requires a bigger space. But getting a home loan as an entrepreneur is a challenge, as it’s not only about the credit or assets, it shouldn’t be impossible. Here are some steps you can take.
Plan in Advance, Thoroughly
The process of getting a home loan for a self-employed borrower is the same as a W-2 employee. Still, the challenge lies in the proof of income you’ll have to present to the lender. Almost all lenders will ask for complete records of your 1099 forms, a balance sheet, and a profit and loss statement. These documents should be ready in advance of your loan application.
You may want to hire a bookkeeper or accountant to help you prepare and record all the relevant information a lender will require. It’s also helpful to enlist the help of a real estate agent who can provide advice and ease the search and buying process. Make sure to discuss your budget with your realtor so they can help you find a house you can afford. Lastly, do your research to understand the market of your choice. You can also use an affordability calculator to figure how much house you can buy.
Show Income Consistency or Growth
Providing the lender with all the required information isn’t enough — it has to look good, too. Most creditors only lend to those whose debt-to-income ratio is under 40 percent, which would depend on your credit score, loan-to-value, etc. An issuer will also want to know how well your company is doing, as well as all your income streams. Of course, it looks so much better to a lender if you have several income sources and your business expands year-over-year — consistent growth is always an advantage.
Tax Deductions May Be a Disadvantage
One of the advantages of running a business is writing off expenses as tax deductions to lower your tax burden. Still, this practice can hurt you when you’re seeking a mortgage. When lenders look at your tax returns, they will see income after the deducted business expenses, which would be a lower amount than what you likely make. This can then reduce the mortgage amount you qualify for or even end up in rejection. Because deductions can make your income appear smaller, you do have a decision to make: If you’re looking to buy a home in the near future, it’s perhaps best to keep your deductions at a minimum.
Co-Sign If Possible
If your partner or a parent has a day job, use that to your benefit when applying for a mortgage as steady W-2 income is more likely to appease lenders.
The Bigger the Down Payment, the Better
A higher deposit will give the loan officer confidence that you are financially stable. Try to save enough money to make a down payment of at least 20 percent of the home purchase price. While that much money may not be realistic for some, increasing the sum you can put down on a home loan is an efficient way to appease lenders.
Slow But Steady
If you’re a small business owner looking to apply for a home loan, it may be worthwhile to plan and get your books in order in a way that is appealing to a loan officer. Buying a home for your expanding company is no small decision, anyway — you might as well do it right.
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