For lenders, the self-employed are a separate animal, with keeping a business running and earning sufficient income both real pressures. But mortgage loans for the self-employed are available if some simple tips are followed.
The state of the economy today makes for getting any kind of loan more challenging. Even business owners that are enjoying relatively stable times, buying a home is not as straightforward as it once was. This is because the risks associated with granting mortgage loans for the self-employed are different.
In the minds of lenders, the self-employed face not only the task of earning enough money to make repayments, but also shoulder the pressure of keeping the business alive. Employees at least only face the task of keeping their jobs, so securing loan approval is easier. But the self-employed are more rigorously examined.
And with the rate of foreclosures involving self-employed homeowners so high in recent years, it is hard not to understand why. Still, a mortgage loan can be secured by the self-employed if some simple tips are followed.
Prove Your Income
It will come as no surprise that the first issue of interest to lenders is income, and whether the applicant has the ability to meet repayments over an extended period of time. It stands to reason then that approvals on mortgage loan for the self-employed are heavily dependent on the applicant proving their business is secure enough to ensure repayments over 25 or 30 years.
Proving that can be tricky, but the best way to go about it is to simply provide income tax documentation. This will illustrate the amount of income earned each year, and confirm to the lenders that everything is above board. This makes securing loan approval more likely though it is never enough on its own to ensure the application will succeed.
It is recommended that only tax returns from the 2 years prior to the date of application should be provided. The clearer the message of income stability the better when seeking a mortgage loan.
Show Business Ambition
But lenders may also want to see evidence that your business has a secure future too. Provide proof of profits through the tax returns for as many as 10 years (if possible) and the lifetime of the business if shorter. Of course, the key concern for lenders when considering mortgage loan for the self-employed is the stability of source of income.
However, another aspect that should be shown is business ambition. While a small business may earn enough right now, failing to develop or modernise could prove commercially fatal in the future. With no foresight indicated, the lender will not be convinced the business will survive, and the chances of securing loan approval are weakened as a result.
So, it is a good idea to provide business plans revealing projected growth and development as part of the application for a mortgage loan. However, be sure to keep them realistic as lenders are no fools.
Prove Sufficient Reserves
Of course, anything can go wrong in business. This has become especially apparent in recent years with the economic downturn that has occurred. So, lenders need to know when considering mortgage loans for the self-employed that the applicant will be able to cover payments for a period of time should their business stumble.
This effectively means that the applicant has enough savings to back up repayments for a period of at least 6 months. From the point of view of the applicant, securing loan approval is harder, but as far as the lender is concerned, it ensures that repayments can be made while the applicant is getting their business back on track.
And reserves relate not just to savings but also investments. So, if there are shares in a global company or other minor business interests, these can sway the decision of the lender when considering the mortgage loan application.