Running your own business might seem like the best way to become financially independent and to chart your own course in life. Unfortunately, owning a company or being self-employed can complicate things when it comes to getting a mortgage or refinancing. You might have the income and assets needed to afford or repay a mortgage. However, on paper it might not look as though you do. Whether you’re new to being self-employed or have run your own company for years, here are a few ways owning your own business affects the mortgage process:
Lenders are typically looking for stability in a borrower. A borrower who gets twice monthly or monthly paychecks for the same amount is generally more appealing than a borrower who has uneven income. Even if the income from your business is fairly regular, self-employed people face another issue. That, as US News and World Report notes, is that their income can look lower than it is. If you are making strategic investment decisions to reduce your tax bill or have a good number of company-related expenses, the income you report on your tax return might not actually reflect your ability to repay the mortgage. One way to legally inflate your self-employed income is to avoid claiming expenses related to your business on your tax return. You might end up with a higher tax bill, but you’ll look like a better bet to a lender.
Debt to Income Ratio
Another thing business owners face that many company employees do not is having an inflated debt to income ratio. Part of being able to repay a qualified mortgage is having a relatively low debt to income ratio. No more than 43 percent of your gross income each month should go to debt repayments. Small business owners and the self-employed often have company related debts in their name, along with personal debts. This can inflate their debt to income ratio and can make getting a mortgage tough.
What to Do
Getting a mortgage when you’re self-employed or running a company might be more of a challenge. One way to overcome that challenge is to give yourself plenty of time to prepare. It’s always a good idea to get prequalified before starting to search for a home. This is particularly important when you are your own boss. Getting prequalified will let you see where you need to improve to get the best rate or to qualify for a mortgage at all. It could be that you need to reduce your current debts, increase your business income, or increase the amount you put down to make yourself seem less risky to a lender.
Do you have more questions about how running your own company can affect the mortgage or refinancing process? Talk to a mortgage specialist at BrightPath Mortgage today. A mortgage professional can help you find out if you’re qualified for a mortgage and can help you plan the next steps.