Buying a home can be overwhelming for anyone, especially when it’s the first time going through the process.
For small business owners — those who, in the eyes of a lender, are considered self-employed — not only can this feeling be amplified because of the extra work, but there may be additional hurdles to overcome throughout the home-buying process.
“Not only do small business owners have to worry about managing the daily operations of their business, but they also have to go through the process of looking for the right home and applying for a mortgage, which can be a challenge because of the higher burden of proof of income,” says Spencer Reid, office manager for Northwest Bank.
However, if you know what to expect before you begin the lending process, from application to closing, the process can be smooth.
Smart Business spoke with Reid about what small business owners can expect during the mortgage process and some tips to make it a little less stressful.
What are lenders looking for from a self-employed business owner who wants to purchase a home?
Lenders verify the income and credit of a self-employed small business owner much the same way they do for any borrower. The self-employed, however, need to provide additional documentation when they start the lending process. This includes two years of personal tax returns and information about any business entity for which they have an ownership stake of 25 percent or more.
Buying a home is a big step, and lenders will expect borrowers to prove that they can take on the responsibility just like anyone else. This includes signing a purchase agreement, providing proper documentation and going through the home appraisal process.
How long does a small business owner need to be self-employed to get a mortgage?
Most lenders are going to want to see a small business owner who has at least a two-year history of self-employed income. Typical salaried jobs can still be considered to help verify income if the business owner works more than one job and the income from that job is sufficient to sustain mortgage payments.
In what ways does the mortgage process differ for a small business owner from the traditional lending process of someone with a salaried position?
The mortgage process is very similar between a self-employed small business owner and a salaried employee. There are, however, some key differences.
First is the amount of documentation that may be required. A small business owner may own or operate multiple entities. In that case, the lender will want to see tax returns for each. Those who have a good filing system for managing their business documents shouldn’t run into any major issues.
What should small business owners expect from their lender throughout the home buying process?
A good lender is willing to make the process as easy as possible through transparency and open communication. Business owners should expect their lender to keep them updated on the progress of their loan and be a knowledgeable, trusted source of information when there are questions. Establishing a relationship with a lender early on is always a good idea because they’ll be the borrower’s advocate throughout the process.
Buying a home is one of the most significant purchases most people ever make. That’s why it’s important that the process is as smooth as possible. Business owners need to be able to continue to focus on running their business. If they’re prepared and have the right banker on their side, becoming a homeowner can be an exciting and enjoyable experience. ●
Northwest Bank is Member FDIC. Equal Housing Lender. NMLS #419814
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