As a small business owner, buying a home can be a challenging process. Some lenders may perceive business owners as having higher levels of risk compared to those with more traditional employment. At times, it can be much harder to prove stability of income. We’ve come up with 10 tips to help small business owners who are thinking about buying a home.
1. Declare Accurate Income
Small business owners usually find it more challenging to get qualified for a home mortgage if they don’t declare their income accurately. Banks usually want to see your tax documents and how much you claimed as income. If you’re planning to buy a home, report accurate income years in advance to limit mortgage lender scrutiny and improve the chances your mortgage gets approved.
2. Separate Business & Personal Income
Keep documentation of both your business and personal financial transactions so you’ll have proof of all your income when you need to apply for a mortgage. Make sure to deposit all your business income into a dedicated bank account for your business. If you pay yourself a salary, it’s best to issue yourself a payslip and pay a separate tax for that. Check out these bookkeeping tips for more help.
3. Know Your Ownership Percentage
If you’re a business partner who owns a portion of a company, you need to know exactly how much ownership you have when you plan to get a mortgage. Mortgage lenders consider you self-employed if you own 25% or more in voting stock of a company. If that applies, you’ll need to include your business’ balance sheet and profit and loss (P&L) statements along with your tax returns when you’re applying for financing.
4. Build Good Credit
Your credit is very important when borrowing, both for your home and your business, as most lenders want to see that you can manage your finances well. It’s essential that you can demonstrate the ability to meet your obligations when they’re due. If you haven’t done so already, build your credit first and ensure that you have a good score before you decide to buy a home. If you don’t have very good credit, you may be asked to put down a higher down payment to get a better interest rate on the mortgage.
5. Own Your Business at Least 2 Years
Most mortgage lenders require at least two years of tax returns when you apply for financing. The longer you’re in business, the higher your chance of getting approved for a mortgage. If you have been in business for less than two years, you may be asked to provide financial projections for your business for the next three years.
6. Consider the Location of Your Office
You may need to meet with your clients and partners from time to time. Find a place that provides quick access to your office and your key stakeholders. Make sure it’s strategically located in an area with convenient access to businesses, clients, and other important establishments that you often need to visit.
7. Find a Home With an Office
If your business allows you to operate from home, make sure you can find a home with either an available home office or an extra bedroom that can be converted to an office so you can save on your rent expense. Assess how much space you need for the home office so you can plan the layout for your home accordingly.
8. Buy a Home That Won’t Require Much of Your Downtime
Business owners are often very busy growing and sustaining their business. It may not be the best idea to purchase a home that’s higher maintenance, requiring a lot of time to repair and improve the property. Look for a property that’s in good condition and with low levels of maintenance required.
9. Don’t Forget To Budget
Saving for a down payment to buy a home is only part of the equation. Make sure that you can afford the monthly mortgage payment, homeowner’s insurance, property taxes, and incidental expenses that will pop up. Your business likely has a budget for its expenses and needs, and your family should have a budget for its needs as well.
10. Set Aside Money for Closing Costs
Getting approved for a mortgage isn’t the final step in the process of buying a home. Closing costs can be 6% or more of the purchase price of your home. As part of your home buying process, ensure that you have enough money to afford both the down payment and closing costs.
Bottom Line
As a small business owner, you’ll find it more challenging to buy a home because it’s more difficult to secure a mortgage. Lenders typically want to see a stable income. Make sure you separate your business and personal monies, have accurate records, and budget for both your down payment and closing costs before you set off to buy your new home.
