It can be tough for anyone to get a loan to buy a new home or refinance their current one, and it’s even tougher for self-employed business owners. Banks now require more financial documentation from all prospective borrowers, but they generally give more scrutiny to the paperwork of entrepreneurs because of the variability in income streams.
Your personal and business tax returns, as well as your company’s financial statements, help to determine how attractive you are as a borrower. Matt Robinson, spokesman for the Mortgage Bankers Association, says lenders typically use a two-year average to come up with your self-employed income. “But if the most recent year’s income is lower than the one before, the lender may use that year instead,” he notes.
The tax deductions and credits that you typically use to lower your income taxes will not come in handy when you’re looking for a loan, Robinson adds. By reducing the amount of taxable income on your tax returns, you’re showing the lender that you have less income to qualify for a loan. Making a large down payment on a property may not be the best option, either, especially if you’re trying to keep your business above water.
So, how can self-employed borrowers boost their chances of getting a home loan? Here are four tips from Robinson:
- Seek out lenders with small-business experience. When shopping around for rates, ask lenders whether they have a history of working with self-employed borrowers. Those who do may be more understanding of your situation than other loan officers and offer lending solutions that fit both your personal and business financial needs.
- Consider portfolio lenders. Portfolio lenders are banks that lend and service their own money, so they’re free to set their own lending guidelines. They hold a portfolio of their loans (instead of selling them to a secondary market), which makes a big difference in their ability to help the self-employed. Many portfolio lenders offer competitive interest rates, just as they would for standard mortgages, but the cost of the loan depends on the amount of risk the lender takes on by approving and holding a mortgage.
- Consider credit unions. Like portfolio lenders, many credit unions keep a good portion of loans on their own books. They are often more amenable than bigger banks to working with small-business owners, especially if you hold multiple accounts with them.
- Boost your income. By rethinking the deductions and credits on your income taxes, you may be able to increase your qualifying income. Robinson says lenders often revisit loan applications if an applicant has filed amended tax returns. However, the flip side is that you may also face a new tax bill, so weigh both options to see which one will cause you less financial trouble.