Starting a business is an exciting time. The process involves a lot of hard work as well as challenges and risks. Applying for a mortgage at the same time can be overwhelming and there are several points to keep in mind if you fall into this category.
First, when you start a business, from a mortgage lender’s perspective you are self-employed. The mortgage qualification requirements for self-employed applicants are different than for a borrower who has a regular job and receives a W-2.
Self-employed borrowers are typically required to provide two years of tax returns to qualify for a mortgage. Lenders average your income according to the Schedule C of your tax returns to determine the mortgage you can afford.
For a standard self-employed mortgage program you may also be required to provide tax returns as well as a profit and loss (P&L) statement and balance sheet for the business. We recommend that you confirm the documents you are required to provide before you apply for the loan.
Review How to Get a Mortgage If You Are Self-Employed
Given these guidelines, you may be required to wait up to two years after you start a business before you can qualify for a mortgage. Your wait may be shorter, however, under certain circumstances.
If your new business is in the same line of work as your prior job and your income is the same or higher, then only one year of self-employed work history is required. So if you were previously employed in the engineering industry for at least two years and you start an engineering business, you can apply for a mortgage after one year instead of two, assuming you are making the same amount of money or more.
Although you are still required to provide two years of tax returns to the lender, only the return for the most recent year needs to reflect self-employed income from your business. The lender also reviews your bank statements to confirm that your income is relatively stable.
The table below shows mortgage rates and fees for lenders in your area. We recommend that you contact multiple lenders to confirm the qualification requirements for self-employed mortgage applicants. Shopping lenders is also the best way to save money on your loan.
The guidelines I outlined above apply to standard self-employed mortgage programs but there is another financing option to consider that may enable you to qualify faster: a bank statement loan.
As the name suggests, a bank statement program enables you to qualify for a mortgage based on your bank statements instead of your tax returns and W-2s and are frequently used by self-employed applicants. As long as regular deposits appear on your bank statements and the deposits enable you to afford the monthly payment, property tax and homeowners insurance, you are in a good position to qualify for the mortgage.
Review How a Bank Statement Mortgage Works
Most bank statement programs require twelve months of statements to verify your income although some programs may require less (and some require two years), depending on your credit score, down payment, financial reserves and other factors. Some lenders require both personal and business bank statements so keep this in mind when you apply for the mortgage.
The negatives of a bank statement loan are that lenders typically charge a higher mortgage rate plus the qualification requirements can be more challenging in other areas. For example, bank statement loans usually require a higher down payment and minimum credit score.
Despite these considerations, a bank statement mortgage can be a valuable option if you recently started your own business. Simply put, this program may enable you to qualify for a mortgage in less than a year, offering an advantage compared to a standard self-employed loan program.
You can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by mortgage program. For example, you can find top-rated lenders in your state that offer bank statement loans.
To summarize, getting a mortgage after you start a business is challenging but not impossible. You may need to wait before you can get approved although the wait may be shorter, depending on the mortgage program you choose.
"B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower." Selling Guide: Fannie Mae Single Family. Fannie Mae, December 4 2018. Web.
"B3-3.4-01, Analyzing Partnership Returns for a Partnership or LLC." Selling Guide: Fannie Mae Single Family. Fannie Mae, June 5 2019. Web.