While owning your own business can be beneficial and rewarding in many ways, getting a mortgage when self-employed is more difficult than ever.
Banks have tightened their lending standards and stated income loans have become a thing of the past. As a self-employed borrower, you are considered more high-risk because you are more likely to have fluctuations in income and there could be a higher chance of default.
To the bank, you are a potential investment and they need to be assured you are a good investment!
Show that you have a history. Instead of paying yourself whatever comes into your business each month consider paying yourself a set salary, the same amount every week or bi-weekly. Put yourself on the same payment schedule as your employees.
This shows consistency and allows you to calculate and budget your probable annual income. You can always take out a higher amount at the end of the year or increase your salary as your business grows. The bank will not only want to see your tax-returns but also your recent pay-stubs.
Owning a business allows you to take advantage of tax deductions but these also reduce your overall taxable income. Consider not taking all of the deductions at once as that can work against you. Speak to your accountant to see if you can take certain deductions at a later time after you secured your loan.
Be able to prove that you can pay in the long run by having reserves in a savings account. This is probably more important than a big down-payment. The down-payment helps you secure a better mortgage rate but having one year’s worth of mortgage payments available to cover when cash flow is tight shows more security against payment default.
Your credit rating should be as good as possible. This shows that even with potentially fluctuating income you have always been able to pay your bills on time and are likely to manage in the future.
Prepare ahead of time. Get your paperwork together to prove your income, your liquid and non-liquid assets and credit history before applying for a mortgage. Inform yourself on what is needed by the lender and have it all ready. Meet with a mortgage loan officer that specializes in obtaining loans for the self-employed. They usually know what mortgage products will work best for your particular situation and can work with you on what you will need.…