Business for self & Less than 2 years history
Business-for-self - or BFS - includes a diverse group of business owners, sole proprietors, partnerships, and other self-employed people. They can often find it frustrating to get a mortgage, with income qualification in particular being a hurdle. In our BFS spotlight, we've dug into some of the challenges past BFS clients have faced, and how we were able to help them. You can find the table of contents here.
In this article, we look at how not having enough history for your business can get in the way of qualifying for a mortgage. Lenders want to see at least 2 years of reported income from the business. This can be a problem for many new businesses that take a few years to show a profit and be able to adequately pay the owners. In addition, tax reporting often plays a critical role in income qualification, which can be issue when the tax year hasn’t finished yet…
Situation: Conner and Mala* are looking to move up to a bigger home - and there’s a baby on the way! They're both experienced software engineers, each having +5 years in the industry. Mala is steadily employed at a big company; Conner also started off working this way. But in mid-2018, he left to start his own venture with a partner.
By the end of 2019, their business was successful enough that they could start paying themselves a small salary. So far in 2020, they're doing quite well and have added 6 employees, in addition to the 2 owners. Conner is on pace to earn 5 times more in 2020 than last year… but the tax year hasn’t finished yet.
Challenges for BFS clients
Just 1 year of reported income, from 2019 (most lenders want to see at least 2 years for self-employed)
2020 income is ineligible, because a tax return/ NOA isn’t available yet
And his 2018 income is excluded, because it was from his old employer (prior to him becoming self-employed)
Resolution: We had a few ways to proceed in this case. They could get a smaller mortgage on Mala's salary alone - but this would require them to dip into savings and increase their down payment. We could look at an alternative lender that would accept a declaration of his expected 2020 income - but this would come with a higher interest rate, shorter term (1-3 years), and other fees you wouldn’t pay with an "A" lender
Instead, we found them the best of both worlds - an "A" lender with a sensible approach for business owners. He could state a reasonable amount of income based on the company's recent performance, even though the tax year hasn’t finished. This ensured they could qualify for the mortgage they needed - at a great rate A lender rate! And it also meant they leave keep their savings intact, as they didn’t need to have a larger down payment. Congratulations Conner and Mala!
Whether you are self-employed or not, we give the same level of diligence, attention to detail and support to all of our clients. Contact us for a no-obligation review your mortgage and financing options, or Apply Now through the button at the top right of the page.
*Names and financial details have been modified as needed to protect privacy :)
