This week’s guest post is from Sasha Belopoljanski and is a little different but, having been through the experience, is super important! Here are some tips for how to get a mortgage when you don’t have it as easy as just submitting W-2s.
So, you ventured out on your own and showed the ultimate bravery, trying something new and completely different with absolutely no safety net. If you’re looking for tips to buy a house now, it’s safe to say you’ve done okay. But truthfully, it can be really hard to prove to the bank that you’re financially stable when you’re self-employed, especially if your business is still in that startup stage. There are a tonne of resources available online that’ll walk you through the process, but here are some tips for entrepreneurs because the circumstances definitely vary from the norm.
Verifying Your Employment
When you’re working a normal, or traditional, 9 to 5 and applying for a home loan, the bank can verify your employment with a five-minute phone call. The lender will simply phone your employer and ask if you work there… hopefully, you are and things are on the road. It’s not quite the same as an entrepreneur. You’re your own boss, you’re self-employed. So your employment is a bit harder to verify here because anyone could say they’re self-employed. You need to prove that your business card does match up with a real business, and of course, with you.
Here are some examples of paperwork you could take along to prove you’re really, truly, genuinely employed:
- A signed letter from a licensed CPA, a tax professional or an enrolled agent
- A signed, official letter from a client from your business
- Your current statement of bond insurance – this should be at least two years old
- A letter of membership from a professional organisation, verifying you’ve been self-employed for two years.
- Do you have a license or registration for your profession? (this can’t be expired.
- Insurance certificates for worker’s compensation and employer liability.
What do lenders want to see?
Lenders want to see that you’ve been legitimately self-employed for two years at least. They want documentation that proves it and they want proof of your income. Lenders need to see it’s been at least two years so they can be sure it’s not still in its start-up phase, and that you’re really in it, and making it work.
If you’re looking to get yourself a mortgage before that two-year mark it is still possible with a lot of extra documentation proving that your business will continue to grow and do well. But honestly, we’d recommend just taking that time before the two-year mark to save some extra cash. Documentation builds up your case, shows your worthiness, and will instill confidence in the bank to lend you money. Be prepared and scrounge up everything you can to prove your new business will make it.
Like we touched on before, as well as verifying your employment, you need to prove your income as well. Because you’re self-employed it’s not as easy as a tax return and some payslips. You need proper documentation and do your best to keep well-managed books… this will help your application process. When applying for the home loan you should have at least two years of personal tax returns and two years of business tax returns, and anything else you can think to take along that proves you and your business are staying afloat, with at least some longevity.
Something that can be confusing here is understanding exactly what kind of income you need to get a home loan. Well for starters, your income probably won’t qualify if it shows a decline greater than 25% a year. Gross revenue doesn’t count either, the income must be taxable with the IRS. On top of that, there are restrictions when it comes to using funds from business accounts with mortgages. It’s best to chat with a home loan expert about all of your options and foreseeable hiccups.
Take care of your credit and your taxes
This is one of those ones that counts for everyone and definitely not just entrepreneurs but it’s still worth saying. Get your credit score up and get your debt right down. You can find apps or programs that help with budgets and paying off debt. Or you can instil some self-control. Sit down and work out your expenses, find any debts you might have, and then put together a strict budget. The next step is to stick to the budget, pay off the debt (as much as possible before taking on anymore), and improve that credit rating.
Make sure you’re on top of taxes, as in none owing, all of your returns are up to date, and you’re a clean, no-mess, business owner. Lenders will always be looking at your taxes when you apply for a loan but especially so when you’re an entrepreneur. In different cities, there are sometimes opportunities for entrepreneurs regarding home loans. These sort of programs are normally based on your ebb and flow of gross and net income, making special considerations as it’s a special case.
When you’re applying for a home loan, the lender will assess your assets, which you need to provide proof of. The issue for many entrepreneurs in this situation is that small business owners mix up their personal assets with their business assets. This can cause some issues in the application process. Keep your mortgage/loan savings saved in a personal, separate-from-business account. You may be required to pay a minimum contribution to the down payment from your personal accounts, depending on the kind of loan you land. Separating your assets will look better, and more impressive to the bank and it’ll make things easier in the long run.
If you’re still planning on using assets from your business account for closing fees, make sure you keep those receipts and collect records so you can show your larger deposits entering the account. Remember that with mortgages, the expenses can add up crazy quickly and to budget accordingly for them.
Do you have a wealth management team? Or a financial team? If you don’t, start building it now. Your team should have members like an accountant, a broker, a financial planner, maybe even your own real estate agent. This team should guide you from the start of the process til the very end, they should act as advisors, helping you navigate the home buying process. This wouldn’t be necessary for normie 9 to 5ers. But, as an entrepreneur, there’s an expectation and a bit of a requirement to ‘make more’, ‘show more’, ‘do more’.
Remember, it’s all about work and showing maturity. Practice self-control, save a lot of money and save well. Pay down debts, focus on your credit rating. Do everything by the books and keep records of everything. Show discipline, drive, and build your empire.
Sasha Belopoljanski is a writer who discovered his passion in providing creative solutions for building brands online. Following this passion, he continues to deliver awesome content through various niches.