You do not fit the norm; you have always been an entrepreneur with enough drive to work for yourself. You make just as good a living as the next man; however, you may have been frustrated at lenders who seem to be looking for the boring square who works for someone else to give money to. It is a shame that the entrepreneurial spirit is not rewarded in the world of finance, but it just isn’t. However, you can use the process of getting your home loan as a free course in real estate finance. Here is how to get a home loan if you are self employed.
Is my business structure as professional as it can be?
The reason that banks seem to prefer the ‘cubicles salaryman/ over the self employed person is stability. Companies with the reach to hire multiple salarymen are usually well organized because of scrutiny from the government and from top competitors. In short, their records are impeccably in order. If all you have are checks thrown in a shoebox, you might imagine how this looks to a lender who is used to seeing line items neatly printed out on the professional letterhead of a pay stub.
Fortunately, it is not a difficult process to employ yourself through an LLC or similar business structure and pay yourself by the same process. Not only does this showcase good business structure, but it also protects your business and makes your income more stable.
What kind of stability are these bankers looking for?
What the banker is looking for is stability. Presenting your income as a stable, consistent paycheck is better than showing your banker a 50 percent drop in income month to month. You can be talking about the same $50,000 over a six month stretch;Â if you earned $45,000 of it in one month, $5,000 the next month, and nothing the following four months, your banker will not like this as much as twelve pay stubs showing a $2500 two-week paycheck that is steady. You would need to save monies from the first months to pay yourself in the last four, and this is part of the stability that bankers enjoy: you actually save money and hold it for tough times.
In the example above, even though your personal income only shows $30,000 over those six months with $20,000 still left in the business, that $30,000 looks like a steady income to a lender while the $50,000 looks like a haphazard, lucky client that may go away at any time.
Is my credit important?
Your credit is essential in showcasing your stability as a borrower. The advantage is that as a business person, you probably have a much longer credit history than the average ‘salaryman.’ Use this to your advantage, but first make sure that both your business credit and your personal credit are showing accurate records. The three major credit rating agencies are not perfect by any means, and you may lose a loan from their mistakes if you do not check your credit at least six months before you walk into a bank looking for a preapproval. Take all of the time necessary to get this fixed, because once your banker sees the numbers and the credit score, that is all he has to go on.
Should I get preapproved?
There is a process that actually precedes the preapproval: the prequalification. This process is not legally binding, nor is it even a promise from a lender to loan you money for the house like a preapproval is. You should not take a prequalification document to a seller and expect him to be impressed. This is strictly for information and relationship building, and the process may even help you understand some of the ways that lenders are forced to think.
The prequalification process takes you through almost everything that the preapproval process does: You will work with a banker to organize your records in order to see how much house you can actually afford. If your banker wants to see certain finances in a certain way, you will learn about it from day one instead of going through the preapproval process and having to wait for weeks only to be denied. Getting prequalified is like the 101 college course, and it also shows your banker that you are serious about organizing your finances.
Once you are prequalified, you will have a better understanding of how to shore up your records so that any bank will take a serious look at your finances. You will improve your chances at a preapproval from many lenders.
Looking at the process of getting a home loan as an education in business seems to work for many self employed people who would otherwise pull their hair out at the extra scrutiny that banks put them through. Banks are still scared from the housing crisis of 2008; try not to blame them. However, once you make it through this financial gauntlet, you will have the ability and structure to present your finances even more professionally. This will only improve your entrepreneurial skills and open up new opportunities for you as a business person.
2 Point Highlight
In the example above, even though your personal income only shows $30,000 over those six months with $20,000 still left in the business, that $30,000 looks like a steady income to a lender while the $50,000 looks like a haphazard, lucky client that may go away at any time.
The prequalification process takes you through almost everything that the preapproval process does:Â You will work with a banker to organize your records in order to see how much house you can actually afford.
