Congratulations. You are an entrepreneur. A word so overused there’s a reason it rhymes with the non-dairy byproduct of a cow. The self-employed usually hear from envious desk jockeys about how amazing it must be to have “no boss.” Hah! Whether your franchise serves thousands of burgers or your company writes hundreds of mortgage loans, make no mistake, you always have bosses.
This leads us to today’s discussion. One of the trickiest mazes you will ever navigate is landing a mortgage when your income isn’t derived from a third party. Here’s the rub. If you are self-employed, a freelancer, contractor, or the owner of an LLC, the financial establishment is often biased against you. Small businesses may be the “backbone of our economy” but when your weary backbone needs a home, you might be better off working at Best Buy. Not to mention you’d get a sweet discount on a Nintendo Switch for your kiddos.
For starters, did you know that the credit card debt your company holds not only hits your personal credit score but your debt-to-income ratio as well? If you were at the magic 43% ratio without your company’s Amex, you better still be at 43% with it. What if your company had a tough year and finished in the red? The bank could decline you even if your take-home income didn’t change or you were profitable for the three years before that, COVID be damned! The point is when the business backing your personal finances is you, there essentially is no “business” in the eyes of the bank. It’s all you baby!
So, what can you do to improve your odds of not just landing a loan but a great rate? As with any mortgage, you have to get your ducks in a row. Prepare a brief summary analyzing why your company is successful and, more importantly, why you are positioned for future success in your market and industry. Tell the story of how your “supply” is in sync with demand. Who are your longest-tenured clients?
Get prepared to verify your employment, preferably with something more professional than a purple, Sharpie-signed piece of copier paper. Tempting as they may be, racy jokes about not being able to “harass” yourself are best left behind closed doors. Start to document your income with as much detail as possible and of course clean up your personal assets and consolidate debt. Be organized. If the lender is used to reviewing applications from people with one neat and tidy W-2, what you can you do to make your application professional and easy to read?
We all know there are lots of tips and tricks to cleaning up your credit score. A year before you think you will want to buy a home, download one of the countless apps that track your score and shows you what red flags are on your record, especially the wrong ones! Even make sure you unsubscribe from all the monthly services and clubs you no longer use. Every penny matters when the bank is skeptical about the source and reliability of those pennies. Take cash out of your savings and pay down your revolving debt. The interest was probably higher than what you were earning so that just makes good common sense.
Remember that one-time windfalls like inheritance or gifts or intermittent revenue from side hustles and hobbies are neither stable nor predictable so they basically don’t count in an underwriter’s eyes. That said, you definitely want to do everything possible to increase your down payment.
But wait! You may have just read all that and said, “Wouldn’t I do all of that anyway whether I worked for someone or not?” Yes! You’re right. The most important takeaway here is if you are an entrepreneur assume nothing will be easier. Quite the opposite. Prepare yourself for review times that are longer. Shopping harder for fewer loan options is likely. You can count on yet even more documents to complete. You will have to go above and beyond to not only portray yourself as bankable as the normal customer but one who is so sophisticated in managing your own finances you clearly must be doing a good job with your business as well. Remember, you were willing to tolerate risk to give yourself a job. The people who loan money are allergic to risk, so you have to think like them, not you.