Unlike W2 employees, who may show their paystubs as proof of income to obtain a mortgage, entrepreneurs have a more difficult time securing a mortgage loan.
Those who are self-employed must find other ways of proving their income, such as submitting their tax returns. However, most entrepreneurs are well aware of the expense reporting process, and how they can use it to minimize the taxes they pay on their business. For small business owners, this can often make it look like, on paper, they make much less than they do in reality, making it more difficult to prove their income and obtain a loan.
Here are three things business owners can do to help obtain a mortgage loan:
1. Gather documentation on income
For entrepreneurs, documentation is key for proving their income and obtaining a home loan. Most lenders will want to see documented income for at least two years. This could include profit margin statements, bank statements, tax documents and other things that prove the borrower’s income or the profitability of the business.
Lenders will only consider taxable income when determining if a borrower can qualify for a home loan. For some who are looking to own a home, it may be worth considering what expenses they report against their business when filing their taxes.
But the borrower’s income will also be measured against the debt they owe. Mortgage lenders typically like to see less than a 43% debt-to-income ratio, meaning the homebuyer’s monthly debt payments do not total more than 43% of their monthly income before taxes. This means some borrowers could boost their ability to qualify for a mortgage by paying down debt.
2. Find the right lender
Sometimes, a borrower’s ability to buy a home hinges on finding the right lender to make it happen. This is especially true for borrowers with more specific needs, such as entrepreneurs. By finding a lender that specializes in creating home loans for entrepreneurs, these borrowers will have a much easier time obtaining a loan and could even reduce their upfront fees to obtain it.
For example, Defy Mortgage’s decentralized web-3 inclusive loan origination process, which is tailored to the individual needs of its customers, can help you during your home loan journey. Email us at [email protected] to speak to an expert about your needs.
Although mortgages from government entities or conforming loans backed by Fannie Mae and Freddie Mac have specific standards and guidelines, private lenders may have their own options for entrepreneurs that create a path to homeownership.
3. Get a co-signer
At times when looking for a solution, it helps to go back to the basics. When someone is looking to build their credit profile for the first time, one of the most common pieces of advice is to find a co-signer to help them take out their first credit card. The same solution may be applied in this scenario.
If the entrepreneur has a spouse or close friend or family member with an income stream that is easier to report, this person can become a co-signer on the home loan. This action is fairly common for entrepreneurs looking to take out a mortgage loan. Of course, it would show up on their credit profile, and they would be responsible to pay if the borrower misses a payment or it would hurt their credit profile.
When taking out a credit card, other individuals can often co-sign without it affecting their ability to obtain their own credit card. However, if an individual co-signs on a mortgage loan, depending on their debt-to-income and overall financial situation, it could prevent them from obtaining a home loan for themselves if needed. For this reason, the ideal candidate for a co-signer would be another adult living in the home.
It can be much harder for an entrepreneur to obtain a mortgage than for other borrowers due to many factors, including the immense burden of proof of income that is required of them. However, there are ways they can begin to prepare to buy a home, and lenders who are specialized in helping them.
Entrepreneurs who are considering buying a home in the near future should focus on making their financial profile as strong as possible by improving their credit score, paying down debt and building up their savings accounts.
Interested in hearing about how Defy Mortgage redefines a more secure and efficient loan process and what that means for you? Email us at [email protected]