How to Buy Property as Self-Employed
Buying property when you are an employee of a company can be challenging enough, but sometimes it can be even more difficult for the self-employed who has worked hard to build an income and customer base over time.
You'll need to prove to the bank that your business is stable enough to provide you with income to cover your mortgage payments, and you'll usually need to have a lot of documentation. If you're trying to buy property as a business owner, your lender may consider the following.
Credit Score
Whether you go through a mortgage broker like CMB Mortgage Brokers for help getting a loan or you deal directly with your lender, you'll likely find that your credit score is one of the first things they check.
The higher your score, the more responsible you view yourself as a borrower, and the better your chances of getting a home loan from regular lenders at competitive interest rates. If you're not sure about your credit score, order your report so you have a chance to fix any problems your lender might see.
Job Stability
Many banks and lenders view people who work for businesses and corporations positively. They assume that if a company hires you, you can stay there as long as you want. While any business can fail, lenders often take a closer look at businesses whose owners are trying to get a home loan.
Rather than just considering how much money you make each week, lenders usually take a close look at all the details of the business, making sure you have at least two years or more of consistent self-employed income.
First payment
Your down payment is one of the most important components of a mortgage, especially with regard to the type of mortgage you get and how much the down payment will cost. Most conventional mortgages require a 20% down payment, but you can also provide a minimum down payment of less than 10% through various US mortgage programs.
If your down payment is less than 20%, you may have to pay private mortgage insurance costs that you didn't anticipate. It's also worth noting that the more money you keep as a down payment, the lower your mortgage will be and the lower your monthly payments will be.
Commercial Documentation
Lenders want to make sure that your business is generating enough money to pay your regular income so you can afford a mortgage. As a result, you may need to provide documentation such as two years' worth of personal tax returns, current income statements, at least two months' worth of business bank statements, and two years' worth of 1099 clients.
You may also need to provide your business's tax returns for the past two years, a business license, a statement from your certified public accountant, and proof of business insurance. The more information you can provide, the more confident your lender will be in approving a home loan.
Debt to income ratio (DTI)
The debt-to-income ratio (DTI) is very important for lenders to calculate your pre-approval amount to find out how much you can afford to buy a house. Most lenders require that you have a total monthly debt of no more than 43% of your income.
If your own calculations show that your debt level exceeds 43%, conventional lenders may not approve your loan application. In this case, you may need to pay off debt, such as a credit card, before applying for a home loan through a broker or directly to a lender.
How to increase your chances of getting a home loan
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Being turned down for a home loan can be scary, especially if you think your business is in a strong position and you've been working hard to earn a healthy income. However, if you're having trouble finding a lender willing to approve a home loan, there are a number of things you can do to make yourself look more attractive.
Start using a consistent documentation system to show your financial position in the months or years leading up to your home loan application. Keep customer receipts and pay yourself regular earnings electronically. You may also see the importance of making a larger down payment and limiting your withholding when you file for Schedule C, even if it means you may have to pay more income taxes in the meantime.
Being self-employed can sometimes pay off