After turning a small business into a success, it may seem like a proper reward would be to obtain a personal mortgage and buy a home. However, that small business, even as a success, could throw some hurdles in the way of reaching that goal. While recent regulations have increased the number of hoops everyone has to jump through to get a loan, lenders can be especially wary of approving small business owners for a personal mortgage loan. Fortunately, there are a few things those owners can do to make the process go more smoothly.
Tips for securing a mortgage loan
A successful small business can be a good source of income, but a bank will want to be reassured that its loan will be repaid. By knowing what will be expected, the business owner can make things easier and increase the likelihood of being accepted.
Credit rating
Before going through the work of gathering the data and forms that will be required to apply for the loan, the first thing that should be done is to determine your credit score. A good report will be needed for the application to be successful. If the scores are not where they should be, it would be a good idea first to increase them. A score of at least 620 will be necessary for approval, while one at least around 740 will be needed to secure the best terms available.
Watch the deductions
While taking deductions on certain equipment purchases may help with taxes on the business, lenders will not view them favorably. A large number of deductions can be a warning sign to banks. A high net income will increase the chances of being accepted for a loan.
Working spouse
Having at least one of the loan applicants with a W-2 job will help improve the possibility of success for the loan. If your spouse is considering quitting their job to help out with the business, have them wait until after the loan is secured.
Hire a bookkeeper
The new regulations can be difficult to navigate and lenders are not able to simply accept what was called “stated income.” Banks will now require extensive financial statements, including income and expense reports. A bookkeeper can help with gathering and preparing the proper information that lenders will need.
Down payment
Be prepared to offer as large a down payment as can be afforded. This will signal to the lending institution that the applicant is serious about the loan, as well as having the added bonus of decreasing the loan amount. It also helps to reassure the bank that it is likely to get its money back on the loan.
Savings
Have enough money in savings to cover a few months of loan repayments in case there are some dry times for the business. Not only will this protect the business, but lenders will be more confident approving the loan knowing there will be money available.
Debt
Avoid having a large amount of debt under your name. Having a low debt-to-income ratio will go a long way toward being approved for the mortgage loan.
Securing a personal mortgage can be difficult for a small business owner. Recent changes in lending regulations require banks to be even more cautious when loaning money than ever before. However, there are several steps that can be taken to improve the chances of success. The most important thing to remember is to prove to the lender that they are not risking their money by loaning it to you. Steady income, low debt and cash reserves will go a long way toward accomplishing that goal.
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