If your home-based business is growing and you're ready for a larger home, applying for a mortgage loan can be complex. Small-business owners often must work harder to prove their income than salaried employees. That doesn't mean a mortgage is out of your reach. Business owners and W-2 employees use the same mortgage application process and are eligible for conforming and non-conforming loans.
Reardon & Associates supports small businesses, families and individuals throughout their financial phases. Whether you’re planning to expand your business or planning to expand your family, we can help. Call (909) 543-0201 to find out more about how you can assist you.
Make a Detailed Plan
Before you begin house hunting, you'll need to prepare your finances. Start by reviewing your budget to see what you can afford. Are there outstanding invoices you can collect or assets you can liquidate? Do you have debt you should pay down?
If you need to get debt under control before purchasing a home, consider seeking the help of a certified consumer debt specialist. A specialist can work with you to relieve debt based on your circumstances and the laws in your state. Your debt solutions vary depending on how much you owe, your employment status and your ability to repay the debt.
Hiring an experienced real estate agent is an essential item to put on your to-do list. According to statistics cited by the National Association of Realtors, almost 90% of homebuyers purchase homes through an agent or broker. If you're able to get pre-approved for a loan, your agent can find properties within your budget and answer questions you have about the loan application process.
Collect Documents
As a self-employed homebuyer, you go through the same mortgage loan process as a W-2 employee. However, you need to provide more documents to prove your income and credit history. Lenders may request to see records of:
- Personal and business federal income tax returns from the last two years
- Profit and loss statements
- Balance sheets
- Credit report from all three credit bureaus (Experian, Equifax and TransUnion)
If you pay yourself a salary, you'll need to provide W-2 forms. Consider bringing other documents that can help lenders see what you're earning, like contractor agreements and receipts.
Reduce Tax Deductions
You've probably taken advantage of tax deductions to reduce your tax liability. When you're applying for a mortgage, though, lenders look at your income after deductions are made. This means if you've written off several expenses, the amount they see can be much lower than your actual take-home pay.
In the short term, claiming fewer expenses may result in a larger tax payment for you, but making your income look as substantial as possible can help you get the mortgage amount you want.
Keep Personal and Business Expenses Separate
Ensuring your personal and business accounts are separate makes things easier for you at tax time. It can also help you during the loan application process. Lenders look at your personal debt; business debt is not counted.
To make your business accounting easier, Venturize recommends maintaining separate checking accounts and credit lines for your business. Running business-related transactions through the appropriate account helps you keep an eye on your company's cash flow and give lenders a clear financial picture.
Save for a Large Down Payment
The more money you put down on your home, the less you'll need to borrow. The simple math behind this concept works in your favor when applying for a mortgage loan. By reducing the amount you need to pay back, you make your situation look more favorable to lenders.
Down payment requirements vary depending on your lender. A traditional bank may ask you to put down up to 30% of the purchase price, while other lenders may require less. Putting down as much as possible, though, helps you obtain a larger loan and keep future payments lower. If your income takes a dip, you'll appreciate smaller mortgage payments.
Obtaining a mortgage for a larger home may involve lots of prep work up front, but reducing debt and knowing where you stand can put you in the best position and help you avoid surprises.
If you would like to explore strategies for increased savings, for the purchase of a larger home, Retirement or other 2021 and beyond objectives, please give me a call or book some time on my calendar.
David Reardon, RICP
Financial Advisor