Monday, February 27, 2017

5 Tips for Business Owners Applying for a First Mortgage

Business owners face a number of challenges when applying for their first mortgage. They lack the clear process of income verification that many employers provide, and they don’t have the same consistent income someone with a job does. Underwriting processes often penalize small business owners for that very reason with higher interest rates while other institutions simply say no to their business. Here are five tips for business owners applying for a first mortgage.

1. Disclose Everything

If you are an employee of a company and own a stake in it as an original founder, you need to disclose this when applying for a mortgage. You should know your ownership stake in the business. If you own a quarter or more of the company, you will need to file a corporate tax return as part of your mortgage income. The profits and losses of the company could affect your mortgage application, but failing to disclose this information (which lenders can easily find out) risks lenders tossing out the application.

2. Secure Proof before Applying

When you work for someone else, your W-2 is proof of your income. Depending on the employer, human resources could verify the loan applicant’s income. What can a small business owner do to provide similar income verification? A letter from a Certified Public Accountant or enrolled agent proving your income is almost as good with most mortgage lenders, while two years of business tax returns and personal tax returns are proof of your income. For skilled tradesmen, bond insurance policies can be used as proof of self-employment.

3. Be Completely Honest About Your Likely Income

Don’t use your best month as your stated income on paperwork. And don’t cite your gross business income as your income when you live off your net income. If lenders find out you inflated your income either way, you’re at risk of being charged with mortgage fraud.

There is another reason to be honest as to your real income. You don’t want to be house poor because almost all your money is going to pay the mortgage, real estate taxes and insurance. Inflating your income in an effort to buy a property means you’re really buying more than you can afford – and this hampers your ability to build wealth, pay down debt or keep that property if your income dips.

The general rule of thumb regarding home mortgage loans is to not spend more than a quarter of your take home pay on all home ownership expenses – mortgage payments, insurance, real estate taxes and HOA dues.

4. Seek Manual Underwriting

Home mortgage loans may be approved by an automated process where they check your credit report or manual underwriting where a human does the research and issues the loan. When a lender doesn’t do manual underwriting, it doesn’t mean they won’t issue a home loan to an entrepreneur with an irregular income. Their alternative may be putting you in a higher interest rate loan with higher fees, treating you as if you lack proof of your income or are a high credit risk.

5. Have Patience

One of the problems entrepreneurs face when applying for a home loan is that business losses reduce their official income. When your stated income is very low, lenders may not want to work with you at all. The easiest solution to this is to wait another year, so that you have a profitable year to report. And take that time to pile up money so you can make a larger down payment. The larger your down payment, the lower the loan amount needs to be. And the interest rate you are likely to be charged goes down, because you’re seen as a lower credit risk. If you can hit that magic 20% down threshold, you also avoid private mortgage insurance.

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