March 27…If you are self-employed and hear the following from your loan officer when going through the preapproval process you should RUN for the hills: What was your income?
Why should these 4 words scare you? After all, loan officers ask this question of wage earners all the time. The answer is fairly straight forward. If you are a W2 wage earner most lenders will go off your gross income. If you are self-employed most lenders will use the net or adjusted gross income. While this seems easy enough it is not how consumers think. What was your income, or how much do you make 9/10 people would answer with the gross income…even those who are self employed. That figure is typically much higher than the net or adjusted gross income figure. This could result in a preapproval amount much higher than it should be leading to a lot of wasted time and effort for all parties involved in the transaction.
So what should you be asked? Simple…PLEASE SEND ME YOUR LAST 2 YEARS OF FILED TAX RETURNS. Let the loan officer calculate the income as he/she should know exactly how the lender would view those returns. It may take a while to submit the returns to the loan officer, but a little extra time can prevent loss and heartache throughout the process.
Below are some helpful hints for business owners:
Business owners may face several difficulties while applying for a mortgage. Some of these difficulties are unpreventable, while others can be dealt with. The biggest obstacle, however, lies in the path of small business owners, who cannot understand how their involvement in a limited liability corporation can affect their position in the financial market.
Following are some of the ways which can help the small business owners to navigate the mortgage application procedure effectively.
A borrower must under no condition, hide their stake in the corporation. They must disclose their financial interest in the corporation. They may try to hide it, but the underwriters are clever enough to find out the mortgage applicant’s financial interest in the corporation.
Knowing about your percentage of ownership
If a business owner owns 25% or more of the voting stock in a corporation, then basically, you fall into the category of self-employed. It means that you must file your corporate tax returns. This tax return, irrespective of whether it shows a profit or a loss, can make a major impact on the mortgage application.
If you make a profit, you may report some or all of your profit, depending on how much you own in the company. On the other hand, if it’s a loss, you’ll have to apply for it on your income.
Structuring your business profits for getting your mortgage approved
You can improve your chances by structuring your business revenues in certain ways. You can take help of a certified chartered accountant for proper structuring of your mortgage loan application. Always make it a point to maintain up-to-date accounts, because the banks and financial services companies will not accept accounts that are older than 18 months.
Form SA302s and will improve your chances quite considerably
Form SA302s is universally considered as a standard proof of incomes. So before applying for mortgages, you will need to get the SA302s forms in order. Generally it takes about a couple of weeks to receive the hard copy of the forms.
Pay off dividends on profits
Paying dividends on capital gains can help in improving the chances of getting loans. It can be done by paying yearly dividends on profits, rather than retaining big percentage of profit in the business.
Don’t apply for mortgage in between the company change process
If you’re planning to change the company type, for example, from a partnership firm to a proprietorship firm, then get it done first. If you are in between the process of company change, then the chances of getting your mortgage application approved are very slim.
Use online financial tools for assistance
There are many online tools like the mortgage rate calculators, over-payment calculators, mortgage deposit calculators, etc that can help you in understanding the exact amounts that you will need to pay under different circumstances. You can check out these mortgage tools here.
If you show consistent revenues and growth, you can get the best deals on mortgages, but not all small business owners will be in a position to do so. If your business has suffered a loss in the previous year, and you are looking to get a mortgage for it, then all you can do is wait patiently.
You must wait till your financial situation becomes stable. The best thing that you can do here is, seek advice from a qualified tax accountant, by keeping your home buying interests in mind.