Over ten million people in the United States are self employed. These hard-working business owners, contractors, entrepreneurs, and investors need mortgage loans just like everyone else.
Unfortunately, many assume the process will be difficult, complicated, and time-consuming. But these are misconceptions. Getting a loan while self employed, as we will show, is easier than you may have thought.
Here are eight common misconceptions, as well as the truth behind these issues…
8 Common Misconceptions About Getting a Loan While Self Employed
1. Lenders Look at Business Revenue
Self-employed homebuyers are often confused about what business information is needed for a mortgage application. Many assume that the lender will look at your total revenues, the amount you bring in before subtracting expenses.
Revenue may be an important factor for your business as a whole, but it’s a non-issue for lenders. What they want to see is total profits and earnings after reducing expenses.
For example, if you have $5 million in annual sales ($5 million in revenue) but your company spends $3.5 million on equipment, labor, technology, and maintenance, your total profits would be $1.5 million. (This is, we admit, a simplified example.) In this case, $1.5 million would be the number used by lenders. They may also use your total earnings or salary from the business, not just business profits. (Profits can be put back into the business as cash savings, while salary is what you personally draw from the business.)
2. Business Owners ALWAYS Need a Cosigner
It’s assumed that business owners are a high risk to lenders. Because they are perceived as a high risk, they need to take extra measures to secure a loan, including the use of a cosigner.
Cosigners reduce risk to the lender by taking on the burden of debt if the primary signer is unable to pay. They may not own the property, but they can be held accountable if the loan goes into default. The misconception is that, because of the (perceived) high risk, self-employed borrowers always need a cosigner.
Most people getting a loan while self employed will not need a cosigner. While we don’t have stats on the issue, in our experience a self-employed borrower is no more likely to need a cosigner than anyone else. If your income is strong, your business is well established, and your credit score and downpayment are high, you should be able to secure a loan without a cosigner.
3. High Interest Rates are Unavoidable
Again, there is a misconception that self-employed homebuyers are a higher risk to lenders. One of the ways that lenders reduce risk is by requiring higher interest on the loan; if someone is thought of as a high-risk borrower, they may be required to pay a higher interest rate.
Self-employed borrowers with a solid credit score and a strong downpayment can expect a fair interest rate on their loans. You certainly won’t pay a higher interest rate just because you are self employed.
Note: If you have searched for a self-employed mortgage loan but have found only high-interest options, contact our team. We may be able to secure better terms for your next loan.
4. A 20% Downpayment is Required if You are Self Employed
This is a misconception that applies to downpayments on self-employed loans as well as loans for employees. Many assume that a 20% downpayment is a basic requirement for all home loans. While this misconception has dimmed for most loans, it remains a common myth for self-employed mortgages.
If all other factors are strong (downpayment, credit, debt load, etc), there is little chance you’ll need a 20% downpayment. In fact, some self-employed borrowers may qualify for FHA loans, which require as little as 3.5% in certain situations, or USDA and VA loans, which can be secured with no downpayment.
5. You Need Three Years (or More) of Successful Business
There was a time when business owners needed three years of accounts to show average profits and revenues. This obviously requires that the owner be in business for at least three years.
Some lenders may still require three years of business reports, but most only require two while others require as little as one year of information. If you have been working in your business and have seen successful incomes for two years, you will likely qualify.
6. Only Small Loans are Available to Self-Employed Borrowers
Again, self-employed borrowers are believed to be a higher risk. To reduce risk and not be too exposed to potential losses, it’s believed that self-employed borrowers can only take out relatively small amounts.
When getting a self-employed loan, borrowers can secure large amounts. Many business owners, contractors, freelancers, and investors will qualify for loans equal to the conventional loan limits. Some will even qualify for jumbo loans worth millions of dollars.
7. You Can’t Refinance When Self-Employed
Suppose you took out a mortgage ten years ago, at a time when you were employed at a steady, secure company. Because of circumstances, this mortgage came with a high interest rate. Now you have taken the leap to self employment. There is a misconception that you can’t refinance because you are now a business owner.
Almost anyone can refinance, including self-employed borrowers. If you have taken the leap to self-employment, you may have a larger income. You may have paid off debts or improved your credit score. These factors could help secure better terms, including a lower interest rate.
8. It’s Harder to Get a Loan When Self Employed
Overall, people just assume it’s hard to get a loan when they are self employed. They assume that the process is complicated, time-consuming, difficult, and frustrating. They assume it will result in a high-interest loan with terms that make homeownership expensive.
Honestly, the hardest part about getting a loan when self employed is finding the right mortgage lender. Once you find a team that understands business owners and can work with your specific situation, you’ll have far less trouble finding a mortgage, regardless of your employment situation.
Getting a Loan While Self Employed is Easy with Our Team!
If you are a self-employed homebuyer looking for a low-interest loan with a reasonable downpayment, contact our team today. We have years of experience in the mortgage industry, and can help you secure a top-quality loan that fits your unique needs!