There are two things that we aim in life – buying a home and starting a business. But can they can go hand in hand? Can small entrepreneurs have and eat their cake?
If you have a typical job it would be much easier to prove your income and employment during the process. However, for a small business, getting a mortgage can be tricky.
With that being said, many would-be business owners are forced to prioritise their family home first. This shouldn’t be the case. Your dream business should not negatively affect your mortgage eligibility. For a little help, below are the five things you need to know before getting a mortgage for easy approval.
Preparation is the Key
Obtaining a mortgage for a small business is the same as the same as a W-2 employee. But the difficulty lies in the proof of income. A lender will require full records of the 1099 forms, a profit-and-loss statement and a balance sheet. These documents need to be prepared in advance of your application.
Most lenders are looking for documents that prove you’ve been self-employed for at least two years. It is for them to see that you are in a real business and not just a half-baked phase. A less than two-year-old business is going to be more difficult to get a mortgage, but it is still possible.
To make it easier to prepare and record the information a mortgage lender will require, hiring a bookkeeper is advised. It can also help you ease with the process to get the advice and insight of a good mortgage broker. These people are essential for understanding the planning process and addressing any issues early on than be surprised after you start the process.
Prove your Income
The lenders need more than your word to prove your income as a business owner. Provide them with the necessary information to show your income consistency or growth. They prefer your debt-to-income ratio to be under 40%, though it may depend on various factors like credit score and LTV(loan to value).
A mortgage underwriter will need to know if your business is doing well. Is it a reliable source of income? If your business grows year over year, it will be easier for a loan officer to approve the loan. Additionally, income consistency is also a plus.
According to Quicken Loans Home Loan Expert Dennis Spensley separating the funds for a down payment and settlement fees in a personal savings account from your business assets works best. Many small business owners combine their personal and business assets which can cause issues when they apply for a mortgage. Separating your personal funds from your business accounts will make things easier.
Additionally, if you are planning to use assets from your business accounts to close, make sure to keep receipts and clear records that show your larger deposits entering that account. Closing costs can add up fast so make sure to budget accordingly.
Co-sign if possible
Co-signing with a spouse with a day job is more likely to appease loan officers. Take advantage of your spouse with a stable W-2 income as it can help you get the approval easily. If he/she plans to quit the job, it is better to hold her/him off until the application process is finalized.
If your single, consider co-signing with your parent or another relative with stable W-2 income. It might sound risky for the co-signer as he/she will be held responsible should there be default in your payments. But it is worthy to consider especially if you have been denied multiple times.
The Bigger the Down Payment, the Better
A large amount of down payment will give the lender the confidence that you are financially stable and that business is doing well. If possible, try to save enough money to make a deposit of at least 50 percent of the purchase price.
It may not sound realistic for everyone but increasing the amount you can put down on a mortgage is one way to appease the loan officer. As a small business owner, your income may appear smaller to the underwriter but giving a bigger down payment can help you get the approval.
The burden of getting a home loan for a small business can be trickier. Some are unavoidable while others can be carefully dealt with. But it is certain that it is not possible. It can be achieved through careful planning and heeding the right advice.
Ask help from the right people like a bookkeeper or a mortgage broker to ease with the process. Prove your income, separate your personal from business assets and co-sign if possible. And give a bigger down payment to impress the loan officer. You’ll get a thumbs up!