There are some who contend there has never been a time in American history where so many self-employed and entrepreneurial people have either started or are planning to start their own business. There are more than a few theories as to why this is taking place, but the practical reality of the situation is creating demand from ambitious people for options like bank statement loans in the housing market.
Since the self-employed are rarely able to provide months and months of pay stubs and reassuringly consistent love letters from HR and payroll, traditional lenders are often reluctant to do business with them. Doesn’t necessarily make them bad people, it’s just that after some 80 years of traditional breadwinner-class employment, banks would rather see all the standard checkboxes checked. Some guy telling stories about patents, investors and accounts receivable doesn’t necessarily get the job done.
So what is a self-employed person to do when it comes to finding a mortgage?
As an entrepreneur, when you go to borrow money, it is best to treat it like going to an investor. Have your bank information, tax returns and basic financial statements in order. Make certain you can produce as many consecutive years of documentation as possible, and make it clear what your business is. If you can show growth and consistent income month by month and/or quarter by quarter so much the better.
It is always a good idea to have this paperwork prepared by an accountant if possible, since they will know what kinds of forms and statements that will impress the loan committee.
As an employee, your income is usually consistent from pay period to pay period and isn’t affected by other factors like business expenses and their associated deductions. While it is true that an entrepreneur has certain advantages at tax time, the truth is the mortgage business is set up to rely on your debt to income ratio. If your income is too low, it can push you out of the market for a loan.
This can create a rock-and-hard-place problem for some borrowers, as the survival of their business can often depend on minimizing their tax burden. Finding a home that can be had for what is left can be an even bigger challenge. Again, the services of a qualified accountant will serve the self-employed borrower well in most of these cases, as they will be able to calculate and project where each set of numbers will fit best.
The further out you are from a loan application, the better chance of success you will have as the time approaches. Time allows you to not only gather paperwork but it also gives you options for restructuring your latest months or quarters of revenue so they reflect well on your qualifications. Consulting with an accountant early can help tremendously in these kinds of circumstances. Give yourself every opportunity, as the process can be tough even for the well-qualified and wealthy.
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