Self-employed must plan carefully to buy a home

Answer: There are a variety of ways to prepare to be a homeowner and not have it impact your business. Interest rates are at historical lows currently, so the time is now. When someone wants to buy a home or refinance one, a mortgage company looks at three main things: the applicant’s credit, funds for the down payment and closing costs, and debt-to-income ratio. Good credit and a bigger down payment obviously make you a better loan candidate.

 

Q: What does debt-to-income ratio mean for a small-business owner?

 

A: As a small-business owner, you are technically self-employed. Most lenders require (the ratio to be) 45 percent or lower. This means that your new mortgage payment added to your existing liabilities like installment loans, credit cards, student loans, etc. needs to be 45 percent or less of your monthly income.

 

Q: What is the current housing market like for self-employed buyers?

 

A: The market is quite good for self-employed borrowers to obtain a mortgage. For conventional loans there are even more instances depending on the credit, down payment, etc. that only one year of self-employed tax returns are needed.

 

Q: How will a mortgage lender look at a small-business owner’s income?

 

A: Mortgage lenders will look at your adjusted gross income, not your gross income. That means the net income after expenses. If someone has a corporation, we will use whatever they are paying themselves as well as any corporate income to qualify them for the mortgage. Your business must be cash positive for the current year and the past two years in order to qualify for a loan.

 

Q: Can being self-employed negatively affect loan options?

 

A: Absolutely not. There is almost no difference in lending criteria between a self-employed borrower and someone who works for a wage or salary. Self-employed people do, however, need much more paperwork to validate their debt-to-income ratio.

 

Q: What paperwork should someone prepare for meeting with a loan officer?

 

A: To prepare for a meeting with a loan officer, a self-employed borrower should collect:

 

Business and personal tax returns for the past two years; business profit and loss statement for the current year to date; personal savings, investment and bank statements for the past two months; and titles to any other property or assets owned.

 

Q: How can someone strengthen and best protect personal credit?

A: You don’t want to have too many personal debts. It’s important that as you get ready to purchase a home, you do not have too much revolving or installment debt, and will need to minimize this as much as possible. Make sure to do these three simple steps to keep your personal and business expenses separate: Run all business expenses through your business, and personal expenses through your personal account; keep a corporate credit card for corporate expenses; limit revolving or installment personal debt, including car and other loans in your name.

 

Q: Is there anything specific that someone should avoid doing now that could hurt their chances of buying a home in the future?

A: Do not commingle business and personal accounts. I can’t stress this enough. Make sure your personal items are in your name and your business expenses are under the company name. Never take loans out in your name for the business. This impacts your personal credit. Do not expect to take money from your business account for the down payment. If this happens, an extra step must happen where a third-party CPA has to verify that the business can run as is despite the withdrawn funds.

 

Q: In regards to tax filings, is there anything that a small-business owner should do to look more attractive on paper?

 

A: Stop expensing everything. Many small-business owners expense as much as possible, to limit their tax liability. This makes total sense for that goal alone; however, this reduces taxable income on your tax return, which can ultimately hurt your qualifications for a mortgage. The key is to have taxable income, so while you as a self-employed borrower will need to write off things, make sure it doesn’t significantly reduce taxable income. The easiest way to do this is to write off fewer expenses in the two years leading up to your home purchase.

 

Q: Are there any home loans that are better for small-business owners to apply for?

 

A: Since Hawaii has such a unique housing landscape, it’s much more about where you want to live and the amount you are financing, rather than what you do that will determine what kind of loan will benefit you most. There are a variety of loans to assist buyers depending on their residence location and career background: conventional loans, jumbo, Federal Housing Administration, Veterans Benefits Administration and USDA Rural Development. A skilled loan officer will be able to tailor the proper loan for your financial needs.