When it comes to things like getting personal credit and loans, small business owners often find themselves longing for the days when they were traditionally employed by another business. There's something lenders find comforting about seeing a "boss" listed on your application. Fortunately, you can still qualify for personal credit and loans as long as you have your paperwork in order.
If you are looking to qualify for a home loan, owning your own business shouldn't hinder your application so long as you've kept things thoroughly organized and documented through the years. Of course, the longer you have been in business and can show an income-producing organization, the better the chance you'll have at scoring a low interest rate.
#1 Plan Ahead
Prior to ever thinking about a home mortgage application, you should plan far in advance and begin using a bookkeeper or bookkeeping system to track all of your records. This includes your 1099 from, profit and loss statements, and balance sheets. These files will be instrumental to a lender being able to verify your business' success and income and, ultimately, approve you for a mortgage.
#2 Prove Stability or Growth
Many small business owners think, "Does my income need to be consistent for me to qualify?" There are fluctuations expected with every small business' income. However, so long as you can prove a "base line", you should be good to go. Lenders like to see that you are able to take a consistent paycheck out of the business or, especially, one that is growing year after year.
So, if you distributed $25,000 to yourself in the first year, then $27,000 last year, and now $30,000 this year, you are highly likely to be approved for a mortgage based on this growing income so long as paperwork shows that your business' income itself is staying consistent or growing as well (no lender wants to see an owner who's taking pay raises while their business' income dwindles).
#3 Check Your Deductions
Filing taxes is probably every American's least favorite time of year, however, you need to be paying extra attention to your taxes if you are looking to apply for a home mortgage in the future. First, be careful about the tax deductions you are taking. While they are a great way to lower how much you owe in taxes, they will also make it look like you make less money, which can hurt your application.
This is true for both your personal and business tax forms. While many lenders will look at gross income, which is income before taxes, certain deductions on your tax form may be taken out beforehand and factor into your gross income. You should, of course, be working with a licensed CPA to help you file your taxes and ensure everything is accurate.
#4 Track Your Credit Score
Your credit score is going to be given huge weight during the mortgage application process. You have to be proactive with your credit score and begin working to improve it now if you want to be approved for a high loan amount and a good interest rate. Many factors affect your credit score, but they include inquiries, average length of accounts, your available credit, and your credit utilization rate.
To help improve your credit score in the months leading up to your mortgage application, do not close or apply for any new accounts. Do not apply for credit line increases either as this will often result in a "hard pull" meaning a new inquiry will appear on your report. Lenders get weary when they see a borrower who has recent inquiries as it can be a red flag that you're credit hungry or not able to afford your lifestyle with the credit you currently have.
And, of course, work to pay down your balances, especially on higher interest cards. If you happen to have a few too many credit cards, consider closing store cards and newer accounts that have high interest rates or low limits.
#5 Consider A Bigger Down Payment
Most people who are looking to buy a new home do not want to think about putting down a bigger down payment. After all, down payments will already be costing a minimum of 3% of the home's purchase price and they can quickly eat away at your moving money, furniture money, and savings in general.
While you should not put down more than you can afford or are comfortable with, it may be necessary to put down a larger down payment to score a lower interest rate or a higher loan amount. Start with the minimum required with the mortgage product you are looking into and then consider adding a little more than the minimum.
Some programs allow a portion of your down payment to be gifted or come from a down payment assistance program.
Are you shooting for a low interest rate, or a down payment assistance program? Horizon FHA Home Loans might be a good option for you.