Unfortunately, if you are a small business owner, qualifying for a mortgage and getting a good mortgage rate can be more challenging than if you were simply employed. However, plenty of business owners do succeed in getting mortgages. The important thing is to know how owning a business can affect your mortgage so you can make the necessary preparations before applying.
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You Ideally Need to Have Run Your Business for Two Years
The key challenge that business owners face when applying for a mortgage in comparison to employed people is that mortgage lenders typically require business owners to have been self-employed for at least two years. That even applies to people who have only a 25% share in the ownership of a business. The reason for the two-year rule is business owners are more at risk than employed people who have a steady income. So, the lender needs to ensure your business is in good financial standing before approving you for a loan.
There are exceptions to the two-year rule, though. If you can show a two-year history of employment in a similar line of work, you could qualify. Sometimes, mortgage lenders will consider people who have one year of related work in addition to a full year’s formal education or training. There are also lenders that specialize in mortgages for business owners.
Your Finances Affect Your Mortgage Rate
As a business owner, it is important to know how credit scores affect mortgage rates. You can find different lenders with different mortgage interest rates from this site, based on up-to-date rates that change daily. But to get the best rate, you need to have a good credit score. Maintaining a good credit score is not so easy when you are a business owner because your income and growth will change drastically from one year to the next.
Your mortgage lender will not only look at your credit score but also your debt-to-income ratio. Most mortgage lenders will expect your debt-to-income ratio to be below 40%. At the end of the day, if you have an excellent credit score and debt-to-income ratio and your business is growing year upon year, you will much more easily be able to get a good mortgage rate.
Business Tax Deductions Could Harm Your Mortgage Application
A great benefit of being a business owner is you can write off some expenses as tax deductions, enabling you to pay less tax. But, unfortunately, the more tax deductions you take, the harder it will be to get a good mortgage rate. It could even result in your mortgage application being rejected. The reason is mortgage underwriters look at tax returns for your proof of income, seeing as you will not be able to provide employment payslips. So, when you take tax deductions, the underwriter thinks you have a much lower income than you have actually taken home.
Because tax deductions can make your income appear lower, you may want to reconsider taking those tax breaks if it means you can qualify for a mortgage and get a better rate.
It is Helpful for Business Owners to Pay Bigger Down Payments
Because your credit score may not be up to scratch and your income could appear smaller than it actually is when you are a business owner, you will stand a much better chance of qualifying for a mortgage and getting a better mortgage interest rate if you can put down a large down payment.
Most mortgages require around a 20% down payment, so aim to put down more. Saving 50% of the property’s purchase would be ideal. But as long as you put down more than the standard down payment, you can better appease mortgage lenders.
