Entrepreneurs are busy trying to build and stabilize their businesses. As a result, the prospect of buying a home may feel out of reach. After all, entrepreneurs aren’t always able to point to reliable income and a steady financial picture, all of which contribute to their ability to score a loan. Fortunately, being self-employed doesn’t have to preclude entrepreneurs from taking on homeownership. Read this guide to learn eight money moves that can help entrepreneurs secure a loan and buy a home!
1. Keep Utilization Below 30%
Lenders want to see that you’re fiscally responsible. And that means you’re not amassing large credit card balances that can become cumbersome to pay. You should maintain low credit utilization balances as a clear indication that you’re smart with your spending habits.
You’ll want to be under 30% or, if possible, under 10%. Make sure you don’t have high balances on any cards. And if you have a recent track record of high utilization, commit to a few months of lower utilization to help your credit score and reports look better. Then apply for a loan!
2. Create a Predictable Income
While the business you’re running may be prone to seasonal swings, you’ll need to find a way to keep your income consistent. Lenders don’t want to see income volatility, as that could suggest you won’t be able to make mortgage payments some months. Make sure you’re giving yourself a regular, consistent income each month. And do this for around a year before applying for your loan. Lenders will appreciate seeing an established record of regular deposits from an entrepreneur.
3. Pay Off Debts
Do you have a car loan or lingering student loan debt? Or have you taken our personal loans to help get your business up and running? If you’re carrying a high debt load, that won’t make a positive impression on lenders. And it will cut into what you can reasonably afford when it comes to a mortgage. Make a concerted effort to start paying off your debts, and create a better budget.
Start by looking at the debts with the highest interest rates or monthly payment totals. Look at refinancing options for debts that you can’t pay off right away. When you do this at least half a year before applying for a mortgage loan, you’ll be able to trim your debt.
4. Look into Alternative Loans
Many lenders will evaluate your tax returns to assess your income and financial stability. But this traditional loan approval method isn’t always a good match for entrepreneurs. It may be better to look at alternative self employed home loan options.
Bank statement loans, for instance, will look at your deposit history over one or two years in your bank account. This is an alternative way to verify that you’re receiving a regular income and making wise financial decisions. Just be sure to understand what the requirements are for these types of loans, and what fees apply.
5. Keep Personal and Business Finances Separate
The last thing you want to do is make it harder for underwriters to approve your for a loan. But bank accounts that mix business and personal spending will do that. It’s essential to maintain separate accounts for at least a year before applying for a loan. That way, you’ll be able to demonstrate how you’re managing both your personal and business finances.
6. Amass More Savings
If you see a dip in sales or encounter an unforeseen expense, you might need to draw money from your savings to pay your mortgage. And lenders want to feel confident that you have enough saved up to do this, if needed.
Maintain a separate savings account where you deposit money each month for emergencies. Ideally, you’ll have enough money in the reserves to cover at least three mortgage payments. Keep siphoning money from your monthly paycheck to this account so you can grow it. And resist the temptation to use it for anything other than emergency expense!
7. Solidify Your Tax Strategies
Yes, taxes can be a hassle. But when you take the right approach to doing them, you can make yourself look like a better candidate for a loan. You’ll need to strike the right balance with your write-offs. Too many deductions won’t help your case, even if they save you money. A CPA can help guide you toward the best strategy, especially when you let them know you’re working toward a home purchase.
8. Check Your Add-Backs
Business deduction add-backs can help when you’re seeking mortgage approval. Add-backs are expenses that are re-introduced to your business’s earning totals. Add-backs can improve your business’s profitability picture and, by extension, your profile as a loan applicant. Track all deductions that you can use as add-backs. And, of course, consult with a CPA to ensure you’re providing enough details to you lender.
Make Planning a Priority
As an entrepreneur, you’ll need to invest in some extra planning to make home ownership a reality. Trim your debt, build more savings, and avoid high credit card utilization. With these strategies, and some careful work with a CPA, you can craft a stronger financial picture. When you invest in the right money strategies sooner rather than later, you’ll be on your way to buying a home.
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