Advice for successfully securing a home mortgage when self employed
With the extinction of the dinosaur known as the stated income loan, many a self-employed homeowner and homebuyer has come to believe that obtaining a mortgage for the purchase or refinancing of a home is virtually impossible. But is this really the case? Are lenders willing to make a house loan to the millions of business owners across the country, and if so, what steps do these individuals need to take in order to stack the deck in their favor? The advice below sheds some light on how to get a mortgage if you’re self-employed, and cover the basics that anyone in this situation needs to know should they be thinking of giving up before starting.
Do
- understand the definition of self-employed
- get organized
- build and engage your team
- stay the course
Don't
- assume you cannot get a loan
- file your tax return without speaking with your loan officer
- commingle business and personal finances
- put your business on the hook
Do understand the definition of self-employed
First things first, who is self-employed? Most lender definitions of self-employment state that the loan applicant has a 25% or greater share in the business. If you meet this description, you are self-employed. If you have less than 25%, your lender may be able to use a different standard to determine your income levels for past and present. And what about types of self-employment? Do these matter? They do. Common entities of self employment include sole proprietorships, partnerships, LLC’s, S-Corps and corporations. Even if you get a paystub and W-2 form from a corporation, if you have greater than a 25% ownership in that interest, you may be considered self-employed.
Do get organized
Self-employment, by nature, can shift the responsibility of organization and bookkeeping to the home loan applicant. Before you seek to obtain a mortgage, get your business’s books in order. This will both help you understand what you can afford and it will help your lender qualify your income.
Do build and engage your team
Does your business retain a bookkeeper and tax professional? If so, have your team on board with your attempt to get a mortgage and make sure they all know you are about to undertake the home loan process. If you work with a CPA or tax attorney, seek their advice as you embark on the pre-approval process, and let them know your lender may wish to contact them once the application is underway.
Do stay the course
Getting a mortgage if you’re self-employed is not impossible. That said, it can involve more effort than if you were a salaried employee or wage earner. So be prepared to help your lender make your case for full approval. Keep good records, be patient and accommodating and know that the due diligence that the lender must exercise for the self-employed file is held to a higher standard. You are not being singled out and the lender’s inquiries are not personal.
Do not assume you cannot get a loan
Loans to the self-employed get made every day. And this has been true for every year since stated income loans disappeared. But in order for a self-employed businessperson to get home financing, the lender must be able to document sufficient income, assets and credit. Often, a business owner will get caught in the middle of conflicting objectives here — one objective is to show the IRS as little income as possible so as to minimize taxes, and second is to show the mortgage lender higher income in order to qualify for a loan. It may be possible to achieve both goals, and that brings us to our next point.
Do not file your tax return without speaking with your loan officer
The salaried borrower gets a paystub and a W-2 form and his/her income is easy to document. But as a self-employed person, most often your personal and business tax returns are the only document that will substantiate your income. Lenders typically look at two years of returns, thus your most recent, or next, filing can have a profound impact on your ability to qualify for any mortgage. If you’re thinking about home financing on any level, engage your loan professional in a review of your tax filings, and together with your tax professional, form a strategy that allows you to meet most of your goals if not all of them.
Do not commingle business and personal finances
To the degree that you can, keep your personal and business records separate. This will allow the lender to accurately analyze your income, assets and credit. If your business has a vehicle that shows as a liability on your personal credit report, for example, your lender needs to know about this so that you’re not double dinged for the payment. If you plan to buy a home, it’s best that your down payment funds are in a personal account and not a business account, so again, the sooner your involve your loan officer in your plans, the more time you’ll have to properly document what’s going on with both personal and business finances.
Do not put your business on the hook
If you plan to take assets or income out of the business to fund your home purchase, realize that the lender may seek proof to assure that you’re not “gutting the Golden Goose.” In other words, if taking funds from the business to buy the house could jeopardize the financial strength of the business, and the business, in turn, is the source of your income and ability to repay the loan, you must be attentive to that fact and be prepared to demonstrate to the lender that financial harm will not be done by such action.
Summary
America’s economic vitality relies on the small business owner and the self-employed workforce. It’s unfortunate that these same individuals often face higher hurdles when obtaining mortgages for the purchase or refinance of real estate. Many have even come to believe it’s impossible to get a loan. This is certainly not true in every case and by following some of the fundamental guidelines above, you, as a business owner, can help your lender help you get the financing you need.
