With an increase in women establishing names for themselves through entrepreneurship, the increase in income and lifestyle drives many into the world of Real Estate. What no one discusses is the the difference in the mortgage application for the self employed. Which places many females into a long list of guidelines and expectations that they had no idea would become factors.
So now that you have a business that generates enough of income for you to pay yourself, your excitement builds and your begin to plan how you will protect your family your asset building. So you walk into your bank expecting good news. After all, you’ve banked with them your entire life and so the process should be simple.
But then your application is denied.
What many do not realize is that the mortgage guidelines, qualifications, and approach to self employed clients is vastly different with many banks simply not offering the products required to meet the needs of self employed clients.
Every boss lady deserves to be properly equipped for the largest purchase of their lives and given the opportunity to strengthen their profile and application.
Below I have listed a comprehensive list with the most important factors to consider before you contact your Real Estate Agent.
Down Payment Factors:
- What your income can afford you: Most business owners write off many of their business expenses to lower their taxes without realizing that your net income is what will be considered when you are pre approved. Ensure that you are not overdoing it to save on taxes to only later harm your chances of purchasing a home at a price that makes sense for your needs. The general figure of affordability is your income multiplied by 5.
- Lenders Look at the Past Two Years Income: Know that most lenders will combine your filed income for the past to two years, then divide it to determine the income used to qualify your affordability. Keep in mind that if your income has decreased in the past two years, lenders tend to look at this less favorably and will need a sound explanation as to what the reasoning is for this. An experienced Mortgage Professional will have discovered this before submitting your application to potential lenders and will not only prepare you for potential responses and will ensure that the appropriate measures are taken to ensure that the lenders they work with will find merit in your application.
- Bank Statements Will Be Required: Your lender will want to see at least six months worth of bank statements to obtain an understanding of your deposits and expenses. If you have a business that heavily runs upon cash, you will need to ensure that you begin putting money into your business account as the lender will use this to confirm the gross income you mention on your application. If mention a gross income of $500,000 but can only prove deposits of $250,000, you will experience issues with your application.
- Providing Your Down Payment: The minimum down payment for self employed clients is usually 10%. The reason for this is because lenders must consider the possibility of you going out of business and require a greater equity position to protect their interest in the property.
- Increasing Your Down Payment Has Benefits: A larger down payment is often a good approach to your application as it shows the lender that you are prepared for your purchase and that you are putting in larger risk as well. Money is strong negotiation factor and is often a great solution for a weaker credit score and challenged profile.
- You Will Have to Prove Things: You will need to be able to provide clear details in regards to the source of your down payment. You will also need to provide 90 days bank account statement to prove that the funds are from your own sources, if that is the case.
- No Credit Cards: Down payments from credit cards are not bargaining tools. It only proves that you do not have much risk in the deal and could walk away if your situation were to change with minimal loss. Perceive your mortgage application like any other business negotiation where both parties are expected to have something worth losing. Lastly, your credit card debt will be factored into your overall property affordability which proves that this is never a solid solution.
- Amortization Factors: If you are in a position to put 20% down or more, this gives you the ability to increase your mortgage amortization above 25 years to sometimes a maximum of 40 years! This will decrease your monthly payment as you are spreading the loan across more years and is often required for many self employed applicants due to lower incomes. Never see this as a negative because you may not be required to pay a mortgage insurance on your loan and can often work out to be cheaper over the course of the loan. Your Mortgage Professional will provide the numbers.
- Your Score Matters, But Lenders Understand: Many self employed clients tend not to have the strongest credit for a wide variety of reasons. If this is your situation, you can provide other factors to your application to establish reasons to consider now being the ideal time for you to purchase. Things like an established business, other assets such as stocks, life insurance policies, cash, and other factors that establish your net worth.
- Your Credit is A Long Term Relationship: Lenders are looking for credit cards with strong repayment history with reputable lending institutions like banks. Secured credits are not seen as ideal and maintaining balances under 50% of your available credit is ideal.
- Behave For a While: Lenders expect two years clean credit history, which means no missed payments for two consecutive years. If you have missed payments, be honest about the reasons for this, as it allows the lender to see you as a real person. They are going to ask.
General Self Employed Factors:
- Appraisals are Common: Many self employed clients will be required to provide an appraisal on the property of interest to ensure that the lender is comfortable with the covenant. The cost is generally $370.00 but can increase for properties with larger lot sizes and properties. Many properties over a million dollars will require two appraisals to confirm the value. Keep this in mind when considering your costs.
- Location is Still Important: Lenders are extremely location conscience and will want to ensure that the property will be marketable should they have to foreclose. Never become discouraged if a lender does not like your ‘dream’ property. Often times, it is better you avoid locations and properties that they do not have comfort in. They study areas and markets, so you can lean upon their opinion. This is an investment just as much as it is the place you lay your head.
- Business Registrations Matter: You will need to have a registered business for a minimum of two years before you can employ under self employed guidelines. Lenders will want to see that you have some experience with what you are doing and will expect you to prove by way of biography, business financials, and net worth details. The more stability you can prove is the better your application will be.
- Taxes Require Attention: You must ensure that all of your taxes are up to date by the time of closing or else you will not close. The government allots themselves the right to place a lien against any property you own should you owe them taxes and places themselves in first position. Essentially this means that should you have a lien placed against your property from the government, when you sell or refinance your property, the government will be paid first, which could mean a loss for your mortgage provider. Your lender will never take that chance with an applicant and will condition whatever is owed to the government in taxes is paid in full.
- They Will Have Many Questions: You may be required to provide a lot of documentation that may seem invasive. You have to understand that when it comes to borrowing a few hundred thousand dollars, the lender is the entity in the driver’s seat. Your Mortgage Professional will be skilled to predict what will be requested and provide a detailed list upfront. The lender reserves the right to make as many requests as required and it is best to tactfully provide the details required.
- Be organized: taking the time to prepare your documents in a clear, concise email with documents being in PDF format will make seriously ease the process for your Mortgage Professional. When your documents are easily readable and sent in a timely fashion, it eliminates surprises that may hurt your application.
- Do not hide things from your Mortgage Professional: Lenders have individuals who are trained in fraud prevention, anti-money laundering, and have seen many trends within industries, locations and applicants. This will only increase the amount of questions asked and will allow you to be perceived as someone withholding information. This is never the approach you want to take and I have never seen it work once. There are blacklists that clients can be placed upon and you want nothing to do with that.
- Dates Matter: Once you obtain your mortgage approval, there will be key dates that will need to be met. Mortgage Professionals understand that our self employed clients are extremely busy and will request as much as possible upfront to keep the process simple for you. Nevertheless, missing dates outlined in your commitment can lead to your mortgage being withdrawn.
These are the most important details required to prepare the self employed female for her purchase and what to consider before embarking on your purchase. With a qualified professional, you will be able to ask as many questions as possible and should feel as if all details have been properly disclosed to you.
Once you are clear on your timing and expectations, entering the real estate market is a key component is creating wealth and provides a sense of pride. If you are strong enough to manage a company, when the time is right, you will also excel in home ownership and real estate investment.
- Find A Lawyer:You will have to close your transaction through a lawyer that is approved by your lending institution. Your mortgage professional should have solid recommendations and should prepare you for the legal costs involved.
- The Cost in Closing Your Purchase: The general figure with closing on a purchase is 1.5% to cover the transfer fees and other things to be considered. This is in addition to your down payment. Your lawyer will prepare you with how much money you will need to bring with you and ensure that you avoid surprises