Entrepreneurship can be a risky gamble.
It's commonly known that 90% of startups fail. For those that survive, it often take 3-6 months to break even during the first year.
Just because your business isn't losing money, that doesn't mean it's stable. To reduce overhead and have more write-offs, small business owners tend to pay themselves only very basic salary for a while.
Bankers, however, use monthly income to calculate the affordability of home buyers. As a result, entrepreneurs often have frustration of obtaining mortgage from banks.
In fact, a considerable number of self-employed borrowers DO have the ability to repay, but they simply are not able to prove that with the requested paperwork.
The good news is that there are plenty of alternative lenders who focus more on the quality of property and its marketability.
They require little proof of income from small business owners. Your bank statements (transactions) can be sufficient to demonstrate cash flow regardless of your salary or tax return.
Not surprisingly, the interest rates on these alternative mortgages are higher than bank rates. It can be 5-15% (Nov 2019) annually depending on the unique situation of each applicant.
That being said, such disadvantage can be offset with two "tricks":
1. Use interest-only mortgage: It's a type of mortgages that never reduce your principal and only ask you to pay interest monthly or semi-monthly. Small business owners often choose to pay interest-only payments in the downtime of their businesses and contribute extra towards the principal after they've made a big sale.
2. Have an exit strategy: Mortgages for entrepreneurs are more expensive. You need a plan to pay it back and switch to a cheaper home loan. Generally, alternative lenders expect you to exit in 6-24 months. Paying the debt off with your business growth, reselling the property and bringing in a co-applicant (e.g. relatives) are all viable strategies.
Running your own business is a way to unchain yourself from a stable, fixed salary you'll earn at a "permanent" job. The majority of entrepreneurs have their slim and turbulent months. Balancing life (like buying your family a house) and work can be extremely difficult.
As a direct lender and advisor, we are always here to help. We'll guide you through most common issues a small business owner can encounter when purchasing and financing their homes.
For more info or free advice, please visit:
www.stonebanc.com | Be the change.