Getting a mortgage can be complicated for a small business owner compared to an employed person. Nonetheless, it’s possible to get a mortgage from a banking institution. Securing a mortgage is difficult because a small business owner has a variable and unpredictable income. The lender will assess the business facility more strictly when getting a mortgage.
In addition, the lender must assess the business’s performance, especially its profitability. These aspects can determine the success of your mortgage application. The strict assessment for small business owners is because the lending institution must ensure that the mortgage can be repaid.
It would be beneficial to go through an educational read or consult a banking agent before applying for a mortgage. That said, here’s how you can get a mortgage as a small business owner:
8 Details About How To Get A Mortgage As A Small Business Owner
1. Provide Accurate Information About Your Income
The best way to start your mortgage application as a small business owner is by providing accurate financial statements. If you provide inaccurate details about your income, you’ll likely be disqualified from getting a mortgage.
The lenders, such as banking institutions, use financial documents to determine how much income you make after taxes and profits.
Additionally, it’s best to provide the financial statements of at least the most recent three years. The lender uses this data to evaluate the performance of your business.
2. Provide All The Required Documents
As mentioned before, getting a mortgage as a small business owner can be challenging, and you might need to provide many documents.
The lender will need you to provide all the documents demonstrating your financial capacity to meet your obligations. Some of the documents you’ll be required to have include the following:
- Financial statements for at least three years preceding your mortgage application. It’d help to have an accountant prepare the documents.
- Documents of incorporation of the business indicating the year it was incorporated.
- Documents of accounts showing personal and business returns.
- Bank statements indicating current expenditure and income.
You should also be ready if the lender requests more documents on the operations of your business.
3. Provide Details On The Business Legal Structure
The legal structure of your small business can determine whether or not you can receive a mortgage. The lender’s approach towards the following legal structures are different because of their composition and nature:
- Limited Company: As a small business owner, if you’re listed as a director in the company, the lender would be concerned about your salary and dividends. The lender uses the data from the company accounts, annual tax returns, and profits. The lender can also request to look into the operating agreement when assessing your role in the company.
- Sole Proprietorship: In this case, the lender assesses the net profit from the business based on your accounts and annual tax returns. That’s because there’s no separation of entities in a sole proprietorship.
- Partnership: If you’re a partner in the business, the lender will focus on assessing your share of the net profit from the partnership. To determine your share, the lender will have to look into the partnership agreement or divide the profits by the number of partners in the business.
It’d be best to prepare all your business documentation if the lender requests further information.
4. Keep Separate Personal And Business Income Accounts
You should also ensure that you separate your income from the business and have proper records. When applying for a mortgage, you’ll have to provide financial records that reflect your income. You can hire an accountant to help separate your financial records from the business.
For example, if your business is a sole proprietorship, you can pay yourself a salary and separate the two accounts. To make the mortgage application smooth, you should issue yourself with a parsnip as proof of payment of salary.
5. Establish Great Personal Credit
One of the greatest determinants of whether you can get a mortgage is your credit. You ensure that your company and you have good credit. If either of the credits is bad, the lenders will hesitate to give you a mortgage. Moreover, good credit indicates that you can properly manage your finances.
In addition, a good credit score indicates that you can meet your financial obligations when they’re due. It gives the lender the confidence to give you a mortgage despite your being a small business owner.
On the other hand, if you have a poor credit score, start building it first. It will help you score well when you finally buy a home. Moreover, getting a mortgage would be easy once you’ve built a credible credit score. Furthermore, poor credit can be costly because you’ll have to put down a higher down payment.
6. Build A Large Equity Cushion
As mentioned before, you might have to make a larger down payment, especially if you have a poor credit score. However, a large down payment on your mortgage is okay because it can help you build a larger equity cushion.
It can help reduce your lender’s risk and boost their confidence. You can also get a better interest rate on your mortgage if you put down a large down payment or make biweekly payments.
7. Use A Portfolio Lender
Portfolio lenders have programs that make it easy for small business owners to obtain mortgages.
It means that a portfolio lender would ask for alternative documentation instead of financial statements or tax returns. For instance, the portfolio lender might ask you for a copy of your business license.
Another benefit of using a portfolio lender to get a mortgage is that they might qualify you for a higher debt-to-income ratio. It means you can get a higher mortgage rate than your income, thus enabling you to buy a better house.
If you have trouble finding a portfolio lender, you can use a mortgage broker to find the best deal. The mortgage broker can find a lender that’ll suit your needs as a small business owner.
Nonetheless, ensure that you end up with at least three mortgage quotations to compare and choose the best deal.
8. Improve Your Debt-To-Income Ratio
The best way to boost your lender’s confidence is by reducing your debt-to-income ratio. In most cases, the mortgage lender would prefer a ratio of between 36% and 43%. You can achieve this ratio by creating a plan to pay off your debts, such as student loans and credit cards.
Settling these loans and improving the ratio before applying for the mortgage is best. It will ensure that your mortgage application gets considered and approved easily.
The Role Of A Mortgage Virtual Assistant
Navigating the complexities of acquiring a mortgage as a small business owner can be daunting. However, with the assistance of a mortgage virtual assistant, the process becomes smoother. This AI-powered tool can guide you through the necessary paperwork, financial documentation, and lender interactions.
From determining your eligibility to helping you understand interest rates, a mortgage virtual assistant ensures that you’re well-informed and prepared, making your journey toward homeownership as a small business owner more manageable.
Applying for a mortgage as a small business owner can be a hectic procedure because of the uncertainties in your business. However, you can boost the confidence of the lending institution by ensuring that all your documents are provided, including the financial statements.
Moreover, hiring a mortgage broker to help you find the best mortgage lender would be easier. Ensure you’ve also shopped around and understand the best deals before settling on a mortgage lender.