The process of applying for a home mortgage for small business owners is filled with obstacles — some of which are avoidable and others that must be dealt with. One of the biggest challenges, however, involves prospective homebuyers who own a small business failing to recognize how their involvement in an LLC (limited liability corporation), sole proprietorship or corporation can impact their status as a borrower.
Borrower guidelines can be complicated, but for the most part are pretty straightforward when it comes to small business owner mortgage applications. Following these three simple steps should help you navigate the mortgage application process with as few bumps and bruises as possible.
1. Disclose Everything
A lot of borrowers don’t realize that even though they collect a W2 as an employee of their company, they still must disclose their stake in the corporation. Others, however, think they can get away with not reporting their business involvement based on advice from their tax accountant.
NEWS FLASH: It’s virtually impossible for a borrower who owns a stake in a corporation to hide it. Underwriters are very good at what they do and can very easily discover a mortgage applicant’s financial interest(s) in a corporation.
2. Know Your % of Ownership
It’s important for a borrower who owns a stake in a corporation to know exactly the percentage of his or her ownership. The general rule of thumb is as follows:
Golden Rule for Self-Employed Borrowers: If you own 25% or more of the voting stock of a corporation then you are technically classified as self-employed, which means you must provide a corporate tax return. That tax return, whether it shows profit or loss, can have a major impact on a home buyer’s mortgage application.
A profit or loss in your business can have a major impact on your status as a borrower. Here’s how it works:
- If your business made a profit you’re eligible to report some or all of that profit on your income depending upon your percentage of ownership. For instance, if you own 25% of a corporation and that corporation made $10,000 profit last year, a mortgage broker can add $2,500 (25% of $10,000) to your total income. The amount changes according to the applicant’s percentage of ownership in the corporation.
- If your business reported a loss you’re going to have to apply that loss to your reported income. For instance, if an applicant owns 100% of the voting stock in his or her business and that business lost $10,000 last year, a mortgage broker will subtract that $10,000 from the borrower reported income. The amount changes according to the applicant’s percentage of ownership in the corporation.
3. Have Patience
In some cases, the only solution for a small business owner looking to get approved for a mortgage is patience — especially for borrowers who reported a loss in the previous year. If this sounds like your situation, the best strategy is to wait to apply to allow for your financial situation to improve. That could be next year, or even the year after.
The most prudent thing to do moving forward is to seek some sound and solid guidance from a mortgage broker and/or qualified tax accountant who you believe has your home buying interests in mind. With this type of teamwork, and potentially a little patience, home ownership is right around the corner.
At Blue Water Mortgage, we have helped countless small business owners figure out how to get approved for a mortgage that makes the most sense for them and their business. We even frequently help small business owners who have had their income increase refinance for better loan terms. If you own a stake in a corporation and are considering applying for a mortgage, don’t hesitate to contact us with any questions you have about your options. Also, be sure to check out this Self Employed Homebuyers Guide to Getting a Mortgage Loan for even more insight on how to navigate the mortgage process.