A mortgage makes homeownership more attainable for many individuals, but that’s not the only reason people take out mortgages. Some business owners take out mortgages to buy commercial properties in strategic locations. Business owners can benefit from an established presence and cash flow from their properties, but it takes extra work to receive a business mortgage. This guide will explore how business owners can obtain financing for their properties.
The Differences Between Personal and Business Mortgages
A personal mortgage is optimal for homeownership. Lenders assess the borrower’s ability to make on-time payments and review FICO credit scores. However, business mortgage lenders assess a company’s financials as well as business credit scores. While a good personal FICO score can help a business owner, lenders giving out business mortgages care a lot more about how a company manages its expenses than how the business owner manages expenses.
Is It Harder to Get a Mortgage as a Business Owner?
It’s possible to obtain a mortgage as a business owner, but it may be harder to qualify for a business mortgage. Here’s what you have to know about obtaining a business mortgage.
How Business Owners are Classified for Mortgage Purposes
Most business owners are classified as self-employed for tax purposes. That distinction holds out if you own at least 25% of a corporation’s voting stock.
Legal Structures and Their Impact on Mortgage Approval
It’s easier to get approved for a mortgage if you are the sole individual in your company. However, corporations have to go through more legwork during the application process. Multiple partners must agree to take out a mortgage for a corporation, and that means the lender has to review more information before giving out a mortgage.
Understanding Tax Implications as a Business Owner
Business owners can deduct mortgage interest payments and depreciation from their tax returns. Deductions cannot exceed $750,000 for mortgage interest payments.
Navigating Through Financial Statements and Tax Returns
Business owners often have more tax documents than individual tax filers. It will take more time to gather these documents and present financial statements to a mortgage lender. However, you can keep all of these documents in the same spot once you gather them. That way, it’s easy to refer back to them.
What Lenders Look for in a Business Owner
Lenders want to see that a business owner has enough revenue to cover existing expenses plus the monthly mortgage payments. They also want to see that the company has a good business credit score. Some small business lenders consider the business owner’s income and FICO score when reviewing applications.
Are There Specific Mortgage Products Available for Business Owners?
Business owners can choose from several commercial mortgage products that can help them finance a property. These loans let you borrow more money than personal mortgages but tend to have higher interest rates.
Types of Mortgages Available for Business Owners
These are some of the types of mortgages business owners can use to get financing for their properties.
Conventional Mortgages
Banks, credit unions, and other financial institutions offer these loans. The term usually ranges from 3-15 years and requires a 20% down payment. You may have to take out a loan of at least $1 million to qualify for a conventional business mortgage.
Government-backed Mortgages
The U.S. Small Business Administration offers government-backed business loans that you can use as mortgages. SBA-guaranteed loans have competitive rates and can help you obtain the necessary funding for your company. The maximum amount for a 7(a) SBA loan is $5 million.
Non-QM Options
Non-QM mortgages allow business owners to qualify for mortgages even if they do not fulfill traditional requirements. These loans let business owners use other information to obtain financing, such as their cash flow, assets, and other options.
Preparing for the Mortgage Application
While a mortgage application can seem complex at first glance, it becomes more manageable if you break it into steps. Here’s how you can prepare for a mortgage application.
Gathering Essential Financial Documents
You will have to provide business documents, such as financial statements, proof of revenue, bank account statements, and other resources. The required documents vary for each lender.
The Importance of Building a Strong Credit Profile
A good business credit score will help you qualify for better financing. A high score can translate into lower interest rates and higher loan amounts.
Understanding Debt-to-Income Ratio (DTI)
The debt-to-income ratio is a key metric that lenders review to ensure that you can keep up with monthly mortgage payments. You can reduce your DTI ratio by generating more revenue and paying off more debt.
Creating a Detailed Business Plan
Financial institutions want to know how your business will use the funds and what the long-term plan looks like. A detailed business plan will entice loan officers to take your request more seriously, and it can increase the likelihood of getting approved. Not all lenders require business plans, but it is very helpful to have one.
Finding the Right Mortgage Broker or Lender
The best mortgage broker or lender offers the lowest rate and the highest loan amount. You’ll have to compare several choices before finding the right one for your finances. Don’t stop your search with one lender. It’s good to compare a bunch of lenders before selecting a business mortgage.
Comparing Different Mortgage Offers
Small business owners can choose from several mortgage offers. Make sure you compare rates, terms, and other details before committing to the right financial product for you.
How to Improve Your Chances of Approval
Even if you aren’t ready to take out a business mortgage, working on your odds is good. These are some of the actions you can take to improve your chances of receiving a business mortgage loan.
Strengthening Your Income Documentation
Business owners often receive income from multiple clients. You’ll have to present all of these documents to demonstrate how much your business earns.
Managing Business Expenses Effectively
Keeping business expenses low will help you save for a down payment, but that’s not the only benefit. A good business budget demonstrates to lenders that you can cover the monthly mortgage payments.
Establishing a Solid Business Credit History
Making on-time payments for financial obligations and opening a business checking account allows you to establish a solid business credit history. A higher business credit score increases your likelihood of getting approved, and you can also end up with a better rate and term.
Conclusion: Overcoming the Challenges of Getting a Mortgage as a Business Owner
It’s possible for any small business owner to obtain financing, but some business owners will have to overcome these obstacles.
Inconsistent Income Streams
Business owners with inconsistent income streams are riskier for lenders, but it’s still possible to get financing. You may have to make a higher down payment or develop some consistent income streams to increase the likelihood of getting approved.
High Debt-to-Income Ratio
Most lenders will reject your application if your debt-to-income ratio is too high. You can trim your debt-to-income ratio by generating additional revenue or paying off business credit card debt and other financial obligations.
Complex Business Financials
A complex set of financials can make it more difficult for a lender to assess your application. Streamlining your documents can simplify the process and increase your chances of receiving a business mortgage.
FAQs on Getting a Mortgage as a Business Owner
It’s possible to get a mortgage if you just started a business. However, the lender will likely review your personal credit score and DTI ratio during the application process. You may also have to sign a personal guarantee.
Business owners need their EIN, ID, financial statements, and other documents when applying for a mortgage. Each type of mortgage has different requirements.
Lenders review an employee’s 1099 forms or review their bank account statements to determine a self-employed individual’s income. While tax returns are a common route, alternative financing gives lenders more flexibility in determining income.
The length of time in business can increase the likelihood of getting approved for a mortgage and result in more competitive terms. Business owners with more experience have navigated more economic challenges and have learned more about their industries.
