If you’ve decided to pursue your dream as an entrepreneur, you should know that obtaining a mortgage is going to be harder without proof of employment or steady income.

In the following article, we show entrepreneurs and small business owners how to obtain a mortgage after moving on from their traditional 9 to 5 job. With careful planning, you can own your own business and your own home.

1. Proof of Employment

After applying for a mortgage, borrowers usually have to verify their employment. This is true regardless of whether you’re borrowing from a traditional bank or an alternative lender.

For regular careers and 9 to 5 jobs, proof of employment can be obtained through a brief phone call with your employer. You can also ask your H.R. department to issue you a proof of employment letter that outlines your position and salary.

But if you’re self-employed, the process is a little different. You are your own boss, which makes what you say about your employment more challenging to verify. Instead, you’ll need to show paperwork to prove the work you do.

The good news is, there are several documents you can submit to verify your employment, including:

  • An official letter from a client or business using your product or service.
  • A letter of membership from a professional organization that proves you’ve been self-employed for two years or more.
  • State or business license if you work in a regulated profession.
  • A current statement of bond insurance.
  • A letter from a licensed accountant or tax firm.[1]

Whatever documentation you provide, make sure it proves you’ve been self employed for at least two years. This will put lenders at ease knowing that your self-employed profession is stable.

This brings up another important consideration for all you aspiring entrepreneurs. It’ll probably take you at least two years before you’re eligible to apply for a conventional mortgage. The added freedom of becoming your own boss also comes with more responsibility. The time it takes to become mortgage eligible is one of them.

Financing your new business can be difficult. Check out Red Door Capital Group’s start-up financing solutions to learn how you can accelerate your business growth.

2. Proof of Income

Proof of income is one of the most critical steps to obtaining a mortgage. As we mentioned above, this step is easy if you work a traditional job, where a letter from your employer or two pay stubs would suffice.

But for self-employed business owners, proving income is a little more onerous. Here, lenders will want to see a steady track record of income for the past two years or more. The following documents will help:

  • Personal tax returns.
  • Business tax return.
  • Other forms of income documentation.

Experts say that only certain types of income will qualify when applying for a mortgage. Usually that means income that is taxable with the IRS, not gross revenues or receipts.

Proving your income as a small business owner is easy with good book-keeping. But it also means you need to manage cash flow and ensure you’re getting paid on time (unlike a traditional job, you might not get paid in biweekly installments as an entrepreneur). Check out Red Door’s cash flow solutions, which help entrepreneurs manage their business expansion by providing ample cash on hand.

3. Separating Business and Personal Assets

Your ability to separate personal assets and business assets can make or break your mortgage application. This means you should avoid mixing the two if home ownership is in your future.[2]

The funds you use for a down payment should also be kept separate from business assets at all times. This also makes sense for tax purposes.

This doesn’t mean you can’t enjoy a salary or dividend payments from your business – you most definitely should! Just make sure these payments are coming into your personal bank account and aren’t tied to your business account.

4. Seek Out Alternative Lenders

If the traditional mortgage environment doesn’t suit you, you should explore alternative lenders that are eager to help the self-employed.

U.S. Companies like Privlo, Impaq Mortgage Co and QKMortgage.com, among others, are looking to make home ownership a reality for entrepreneurs and self-employed Americans. Be sure to check with these and other similar lenders about the options available to you.[3]

As it currently stands, the mortgage market is built around people who have traditional 9 to 5 jobs. That’s why it’s generally recommended that the self-employed wait at least two years before applying to a traditional mortgage lender.

There’s reason to believe this environment will soon change as more lenders look to tap into America’s growing small business class.

To learn about the various ways Americans are becoming self-employed and building their own business, be sure to bookmark the Red Door Capital Blog.  Our blog members get exclusive information about the financing options that can help them grow their business.

For example, we recently ran an article about the impact of rising interest rates on small business.

Other Tips

Experts suggest there are other steps you can take to maximize your chances of obtaining mortgage financing while self-employed. These include:

  • Saving at least 5-10% for a down payment.
  • Having three times the anticipated monthly mortgage payment in savings after the down payment.
  • Have liquid money on hand to cover ongoing expenses.
  • Review your debt-to-income ratio and lower outstanding debt where possible.
  • Run a credit report to determine your overall creditworthiness.[4]

Making Home Ownership a Reality

As an entrepreneur or small business owner, home ownership isn’t without its obstacles. But with careful planning and guidance, you can make your dream into reality in a few short years.

In addition to owning their own home, some entrepreneurs go on to develop their own real estate portfolio to build their investments and generate passive income. If the housing market appeals to you, click here to read about our real estate solutions.


Resources

[1] Patrick Chism (August 24, 2016). “Stressed About Getting a Mortgage? 3 Tips for Entrepreneurs.

[2] Patrick Chism (August 24, 2016). “Stressed About Getting a Mortgage? 3 Tips for Entrepreneurs.

[3] Elaine Pofeldt (June 28, 2015). “Elaine Mortgage Startup Welcomes Oft-Shunned Entrepreneurs.” Forbes.

[4] Chris Ronzio (April 23, 2013). “Mortgage Madness: How to Get a Mortgage as an Entrepreneur.”