Entrepreneurship is without a doubt shifting the employment landscape in the United States.
More than 25 million Americans are currently starting or running businesses. And a recent report from accounting software company Freshbooks predicts that 42 million Americans will be self-employed by 2020.
With so many people entering entrepreneurship, one might assume mortgage lenders are scrambling to figure out how to accommodate their specific financial needs. Unfortunately, that’s not always the case.
Here’s why it’s hard for entrepreneurs to get home loans, and what they can do if they want to buy:
The mortgage industry is behind the times
As more people have started businesses, the mortgage industry hasn’t kept up with the times. Most traditional lenders think it’s too risky to underwrite mortgages for self-employed professionals or small business owners.
Because of this, entrepreneurs who may have strong credit, but more nuanced financial situations (AKA not having a consistent pile of W2s) often struggle to qualify for mortgages.
Why entrepreneurs struggle to get mortgages
For many, this amounts to being locked out of what is still widely considered to be a hallmark of the American dream; owning a home. Homeownership, after all, can help people grow wealth.
Entrepreneurs shouldn’t have to choose between starting a business and buying a home.
The way loans are usually underwritten tends to favor employees with so-called traditional finances. For example, lenders request to see W-2s and paystubs during the pre-approval process.
Unfortunately, there are common misperceptions that small business owners or self-employed workers may not have income stability. (In addition to entrepreneurs, here are other creditworthy buyers who also struggle to get mortgages).
3 tips for entrepreneurs who want to buy a home
- Keep solid records: If you’re a small business owner, it helps to keep organized records to back up the fact that you’re indeed able to afford homeownership. When it comes to proving your income, it’s best to have at least two years of tax returns on hand. Also, lenders may ask you for profit and loss statements to show that your business plan provides a steady stream of income.
- Watch those tax deductions: You’ll qualify for a mortgage based on your taxable income, so having hefty tax deductions may make it difficult to qualify for the house you want.
- Work with a lender who gets you: The reality is, all mortgage lenders are not created equal. Find a lender with expertise in helping homebuyers with non-traditional finances.
Header Image Source: (Photo by Proxyclick Visitor Management System/ Unsplash)