Why Are Business Owner Home Loans Hard To Get?

Becoming a business owner is a professional and financial dream you have likely nursed for some time. You decided to be your own boss and take on all the necessary risks that come with owning your business and working for yourself. Unfortunately, banks do not always feel as enthusiastic about sharing those risks. Because of this, business owner home loans are much harder to qualify for than mortgages offered to full-time employees.

Power of the Paycheck

The main concern mortgage lenders have is that the business might fail and leave you without an income to pay the bills. This can create an ironic situation, where your employees might have an easier time getting a mortgage than you do. Even so, if you can prove that you pay yourself a consistent salary, most banks are willing to move forward. If you do not give yourself a steady paycheck, proving mortgage eligibility can become more difficult.

Two-Year Tax Return

Home loans for small business owners are especially hard to come by for new businesses. Ideally, you should wait for at least two years of profitable operations before applying for a mortgage. This stems from the fact that most banks will ask for two years’ worth of filed tax returns before qualifying you for a mortgage funded by business income. Some banks might even want three years’ worth of tax returns, but this is becoming less prevalent.

Income Calculations

Business owners also tend to qualify for much smaller mortgage offers than employees who make the same take-home salary. This stems from higher taxes and the way the bank calculates take-home salary. Additionally, business owners usually have more opportunities for tax write-offs. Taking these write-offs make great financial sense, but doing so reduces your adjustable gross income. Banks use the adjustable gross income to determine your mortgage eligibility.

Targeted Discrepancies

Even when banks are eager to help business owners buy a home, mortgage agencies can make it difficult. For example, Bankrate reports that, in the summer of 2020, Freddie Mac and Fannie Mae created new barriers for business owners trying to get a mortgage. Some of these targeted changes for self-employed people included the following:

  • Request for proof the individual still has access to the money reported on the last-filed tax return(s)
  • Request for proof that the business provided as a source of income is still in operation
  • Request for year-to-date profit-and-loss statements showing net income
  • Treatment of PPP loans, stimulus checks and other disaster relief payments as non-assets

The Best Solution for Your Business Home Loan Needs

The good news is that getting a mortgage on self-employed income is not impossible. It is also not as hard as you might think if you have a steady income and choose the right mortgage lender. The best home loans for small business owners come from banks who are committed to serving them, in particular: not the banks hoping these business owners never have the audacity to apply.

At National Home Loans, we are so committed to helping business owners achieve the American Dream that we provide a self-employed mortgage product. We often ask for only one year of tax returns and provide non-qualifying mortgages that are not dictated by mortgage agencies. Submit an application today.

Written By

John Giannattasio

John Giannattasio is an independent mortgage broker based in San Diego. He brings a wealth of diverse business knowledge and experience to his mortgage practice, which results in a stress-free, seamless, and strategic experience for his clients.

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