Financing a home purchase can be tricky, especially for small business owners. Lending criteria between a self-employed borrower and someone who works for a wage or salary is similar, however, self-employed individuals need a lot more paperwork to validate their debt-to-income ratio.
Small business owners should talk to their tax preparer about their goal to purchase a home – ideally, a few years prior to the purchase. Mortgage lenders look at adjusted gross income or the income after expenses are deducted – NOT gross income. Many small business owners expense as much as possible to limit their tax liability, however by reducing your taxable income drastically you hurt your chances to qualify for a mortgage loan. Your business should be cash positive for the current year and the past two years in order to qualify for a loan.
Small business owners should not mix together their business and personal accounts. Personal items should be in your name and business expenses should be under a company name. Also, do not expect to take money from a business account for a down payment. If this happens, a third-party CPA must verify that the business can run as is despite the withdrawn funds.
In preparation of meeting with a loan officer, you should gather your business and personal tax returns for the past two years; a 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 property or assets owned.
There are a variety of ways to prepare to be a homeowner. Although interest rates have increased a small amount - they are still really low, so this is a great time to buy. Be sure to work with a qualified and helpful CPA, mortgage lender and Realtor. There’s a wide variety of loans for buyers: conventional, jumbo, FHA, VA, USDA and more, a skilled loan officer will be able to tailor the proper loan to suit your purchase.