The mortgage application process is quite challenging, especially for business owners. Self-employment has its own benefits, however, the irregular income can be an obstacle during home loan application.
Prospective homebuyers who own a business often fail to recognize how being part of a certain business can impact their mortgage status. The mortgage application process for business owners is accompanied by some complicated guidelines.
The Importance Of Getting Professional Help
Mortgage lenders recognize the higher risks of giving mortgages to self-employed business owners than traditionally employed individuals. Meanwhile, some lenders may also utilize your situation to issue unnecessary financial criteria and strenuous payment terms. Since you’re less knowledgeable in this matter, hiring a mortgage broker can guide you through the entire home buying process.
Moreover, a mortgage broker lessens the burden of your journey towards homeownership. Managing a budding venture is already stressful enough, so your mortgage broker can take care of critical paperwork and get in touch with concerned bodies. With their vast knowledge and network in the real estate lending landscape, they can also find better mortgage solutions that suit your needs and qualifications as an entrepreneur.
Here are a few steps to help you navigate the process with as few hindrances as possible:
You Can’t Hide Your Business from Lenders
Your business’ financial statements are relevant to you, your investors, and most importantly your lenders. Some homebuyers don’t fully understand borrowers’ guidelines, and as such, don’t know that although they collect a W2 as an employee of their company, they still must disclose their stake in the business.
Others, on the other hand, knowingly don’t report their business activities thinking they can get away with it. For your information, it’s virtually impossible to hide your business activities from mortgage providers. Underwriters can easily figure out an applicant’s true financial status.
Since mortgage lenders will eventually find out about your business, your next step is to declare an accurate personal income separate from your business income. For declaring your income, providing tax documents that match your declared income can support your application. Also, make sure that your business income is stored in a dedicated bank account only for business transactions. For your salary as the business owner, you can issue yourself a pay slip and arrange separate tax payments.
Moreover, if you’ve owned your business for two years with existing tax returns, your chances of getting approved for a mortgage increase. If your business is relatively new, this is where you’ll need to present financial projections for the next three years.
The Golden Rule for Self-employed Borrowers
Technically, you are considered to be self-employed if your percentage of ownership of the voting stroke of a corporation is 25% or more. This means that during your mortgage application, you’ll be required to present a corporate tax return.
The tax return shows the business’ profit or loss, either of which can significantly impact your mortgage application. doing a side by side comparison of different lenders is a great way to maximise your chances of getting a mortgage. It allows you to apply for loans that fits your circumstances and that you are most likely to get approved for.
How Profit/Loss Impacts Your Mortgage Status
If your corporate tax return indicates a loss, that loss could have a negative impact on your reported income. Let’s assume you own 50% of the voting stick in a business, and that last year, the business lost £10,000. The mortgage broker will deduct £5,000 from your reported income.
The same applies in case your corporate tax return shows a profit. Although, this time the £5,000 is added to your reported income. It’s important to know exactly the percentage of your ownership in the business because this amount changes depending on that percentage.
Your Business is Relevant to Your Mortgage Broker
When it comes to applying for a mortgage, the best strategy is to disclose all information regarding your financial situation. Underwriters are knowledgeable and have the necessary skills to discover any financial interests you may have.
Any discrepancy may hinder your chances of getting approved. Sometimes the best policy is patience. If your business is experiencing losses, it’s probably best to wait for things to get better before applying for a home loan.