Ever since the 2008 financial meltdown and real estate crisis, banks have made some dramatic changes to their lending policies. That’s making it harder for the self-employed to secure a mortgage.
If you own a company and are in the market for a home, here are a few ways to ease the process and boost your chances of getting the loan.
If your business hasn’t been around for at least two years, securing a mortgage is going to be difficult. Self-employed borrowers used to be able to depend on stated-income mortgages — loans made without tax documents or bank records to verify income levels — but those days are gone.
Today, lenders want proof of stability before considering adding you to the books. They look for “a pattern that justifies the decision they’re going to make,” says Mike Fratantoni, vice president of research and policy development for the Mortgage Bankers Association.
“They want to be sure the borrow will be able to handle the payment over time. … If someone is just starting a business, that’s going to be problematic,” he says.
If your business is in the same line of work you’ve had for years, some banks will make a concession and allow just 18 months of tax and income records. However, you’ll need to have a near-perfect credit score and meet all other requirements of the loan.
Stated-income loans are things of the past, so you will need to document every penny you make. Every bank has its own requirements, so find out what they are before formally applying for the loan.
“The most important guidance I can give is to understand what the paperwork requirements are,” says Cameron Findlay, chief economist for LendingTree in Charlotte, N.C.
“Having that paperwork in advance definitely helps your case. You’re able to go to someone and say ‘Here’s my paperwork, now give me a good faith estimate of what that loan is going to be.'”
Online and telephone-based lending programs are convenient. But because they’re remote, you don’t have much wiggle room. When you decide to apply for the loan, go to your bank in person and meet with a mortgage loan officer who specializes in loans for the self-employed.
These experts are familiar with the bank’s variety of loan packages. Should you fail to qualify for one type of mortgage, they might be able to steer you to a different sort of loan.
“The borrower may be fixed on one program,” says Dena Kwaschyn, underwriting executive at Bank of America Home Loans. “But based on how long they’ve held the business, the maturity of profile and their asset situation, there may be a product that’s more amenable.”
One of the advantages of self-employment is the wide range of things you can deduct from your taxes. However, driving down taxable income with those deductions may make it more difficult to secure a mortgage.
“If you earn, say, $100,000 and write off a lot of expenses throughout the year to drive down gross taxable income, that plays negatively into how a lender looks at your overall gross income of that year,” Findlay says. “Lenders look at taxable, reportable income, so write-offs work against you.”
It’s a painful step — and often an expensive one — but you can often refile for those “forgotten” expenses after securing the loan. Check with an accountant before doing so, however.
Being liquid is never a bad thing when you’re applying for a mortgage, but it’s even more crucial when you’re running a business. Self-employment generally causes income levels to fluctuate from year to year, and banks want to be sure you can cover the bills in lean times.
Having a year’s worth of mortgage payments liquid and in reserve in a savings account or other savings vehicle can boost your application’s prospects. It may even be more important than a beefy down payment, which generally only helps you get a lower rate.
Don’t yet have two years of records under your wing, but still ready to buy? A qualified co-signer can help secure a loan.
However, make sure the prospective co-signer has his or her own finances in tip-top condition.
Borrowers who have less than two years of records “will need to have a very strong co-applicant on the transaction,” Kwaschyn says.
“Typically, we look more favorably on someone who will occupy that home with them,” Kwaschyn says.