How to get approved for a Mortgage as a Self Emlployed Entrepreneur
I'm currently in the process of buying a home. I already own a small duplex which I bought years ago while I was working for someone. Mortgages are always a bit of a headache, but the process is much simpler when your employed by someone else. When your self employed things get a little bit tricker. The banks realize that though entrepreneurs are capable of potentially making more money, they are also more of a risk.
Sure working for someone else you can always get fired and lose your income, but typically banks require a few years at a job before you can be approved for a mortgage. At that point you have some security and stability in that job.
As an entrepreneur however, things are much riskier from a banks perspective, we don't have a guranteed paycheck comming in every week. If our business doesn't bring in money we can't make money, and if we're not making money we can't pay our mortgage.
I'm currently going through the process of getting pre-approved for a mortgage as a self employed entrepreneur.
Here's the hurdles I'm currently going through. I've had my business for going on 4 years, although only for the past year have I been 100% self employed. Only in the past two years has my business started making real money. One more challenge is because I already own a home, that goes against me as more debt as well.
It's tax season right now so I just got my 2015 taxes back. Prior to gettting them back I was having trouble getting a pre-approval as high as I would like. Reason being unless I'd been self employed in the same industry for two years the bank will not consider that income for me. Also, though I've had steady employment and steady income going back for years, any income I made working for someone else also can't be considered because I'm no longer working for someone else, I'm working for myself.
I've also gotten a lot of different answers from different mortgage brokers. One mortgage broker approved me for $450,000 but only if I put 25% down. Another mortgage broker could get me pre-approved with as little as 5% down, but only up to $170,000, and told me even that could be a challenge.
Now fortunately for me, my 2015 taxes just came in and I'm able to show two years of fairly high income. If for example I only had one year that would greatly harm my ability to be approved for a mortgage.
Well the whole point of this post is to tell you what your up against if you're self employed as well as giving you some tips on how to become preapproved for a mortgage as a self employed entrepreneur.
1. Pay down your debts as much as possible. You want a low debt to income ratio. Pay any debts down below 50%. If you have a car note at $10,000, pay it down below $5,000.
2. Don't open up any new credit cards or lines of credit, and don't close any old ones.
3. Don't have your credit checked unless it's to get pre-approved for a mortgage. Hard pulls and soft pulls hurt your credit in the short term. Avoid these.
4. Stockpile cash. If your not approved for an amount as large as you would like you can pay cash to make up the difference. Cash also shows the bank even if you have a slowdown in business you have some cash stocked away to pay your expenses.
5. Just because you have a Payroll doesn't mean your not self employed in banks eyes. I initially had spoken to some mortgage brokers who told me because I do a payroll and don't pay myself whatever, whenever I want like many entrepreneurs that I'm not considered self employed. This isn't true.
6. Have your LLC, Inc, SCorp, etc taxes, the banks will want to see them along with your K1 and personal returns.
7. Talk to several mortgage brokers. Different brokers work with different banks who have different programs and varying degrees of risk.
8. Try to stay in the same industry. Most of us make our money online. Even if your selling hoverboards today, and doing affiliate marketing next year, don't change the IRS designation for what you do. It's all online sales or ecommerce, keep it that way. If you hop industries the bank may want to see another two years of income in that particular industry.
9. Don't overdo tax writeoffs. Though none of us like paying Uncle Sam, the writeoffs on your taxes also come off your income. Typically I'm fairly conservative with my writeoffs however I used a new accountant this year who wrote off a lot of rental property appreciation and other things. This wound up dropping my income by about $8,000, so that's $8,000 less in income I can show to the bank.
10. Hard money lenders, just something to be aware of. A hard money lender is typically a company or private individual who will lend you money, typically at a fairly high rate 10% or more. Some people in sales or who are self employed may do this as a temporary way of getting funding with the plan of refinancing into a traditional mortgage once their two years are up and they can show two years of solid income at their sales job or as being self employed.
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