Pursuing homeownership as a small business owner

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The home buying process is filled with excitement, joy, frustration and paperwork. This is true for business owners as well, however, there’s just a bit more … paperwork. Don’t be intimidated—these tips will help you buy your home with confidence.

As you begin your hunt for the perfect home, you’ll need to contact a loan officer to get pre-qualified for a mortgage. That loan officer will look at your total financial picture to determine the amount and terms of the loan for which you are qualified.

“When you’re inquiring about a residential mortgage, we look at three things: CIA, or credit, income and assets,” says Mark Ellmore, a SunTrust Mortgage loan officer in the Washington, D.C. area with nearly 40 years’ experience in mortgage and banking. “Those are the three things [we look at] no matter what.”

The bank’s requirements for most of these factors, such as your credit score, debt-to-income ratio and down payment, are the same for W-2 employees (most standard employees) and small business owners.

The process diverges in the proof of income. A W-2 employee typically only needs to provide a W-2 and his or her most recent full month’s paystub, Ellmore says.

Small business owners are typically required to provide the following:

  • Most recent two years of both personal and business federal tax returns with all schedules and any company documents pertaining to those returns
  • Year-to-date profit and loss statement and balance sheet

This additional paperwork will help familiarize the bank with your personal income and the overall health of your business.

“Basically, we want to know, is the business profitable or not?” Ellmore says. “If the business is losing money every year, or one year making money and then the next year making less, that’s declining income and that may have a negative impact on your mortgage qualifications.”

Business owners should, however, expect some rigidity in the mortgage process due to the legal requirements lenders must meet pertaining to mortgages.

Remember that different lenders layer risk differently, meaning that some of these requirements may change depending on your overall financial profile. For example, if you have a much larger down payment, lenders may require less proof of income paperwork, Ellmore says.

Talking to a lender before you even start looking for a home will help clarify these issues for your personal finances and set you on the right path early on.

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