Before 2007, it was comparatively easier to get a mortgage as a business owner, or any other type of self-employed professional.
Entrepreneurs may enjoy a lot of flexibility and financial autonomy in their careers; however, the downside to that is that many of them write off as much as they can, in order to keep their businesses running. With the massive tax deductions they benefit from, off their cash flow, at the end of the day, they may find they don’t have sufficient income on paper for a mortgage, as handed out by lenders nowadays. Are there any solutions to this complex situation? What other financing options for residential properties do entrepreneurs have at their disposal in 2014?
The end of equity-based mortgage loans
The situation was entirely different for business owners, back when equity-based mortgage lending was available. Such loans, which were also referred to as “no doc” or “no paper” and which required no income verification, were readily available to them from most banks. If a debtor put down a sufficiently large down payment (ranging between 30 and 50 per cent), the bank would award them the loan solely based on stated income. There was no need for further income verification, or any means of proving the debtor had the ability to repay the loan in question.
However, in May 2010, that all changed in the U.S. – as well as in the UK, and other parts of the world, too. Back then, the United States Senate reacted to the dramatic loss of money incurred by banks and passed regulations against such loans. The Senate argued that financial institutions had engaged in predatory lending practices by offering “no doc” or “liar” loans. At the same time with the depletion of numerous banks’ lending portfolios, the global real estate market also saw a decline in terms of residential housing prices, which also supported the authorities’ decision. As a result, most banks nowadays don’t offer asset-based mortgage loans anymore – though some smaller private institutions do still make them available.
What are your mortgage options as a self-employed professional?
If you’re considering taking out a mortgage loan as a business owner, most credit industry experts will advise you to go in for a ‘vanilla’ (i.e. typical) loan. Standard mortgages usually come with lower interest rates and a longer maturity term. This is actually the reason for which most experts also advise lenders who did manage to take out an equity-based loan to refinance it as soon as possible. Such loans now typically carry high interest rates – and for business owners, they are actually difficult to refinance, too. That’s because refinancing a loan involves providing proof of income and asset ownership, which is difficult for business owners. The first step in deciding how to refinance an existing mortgage, or take out a new one, as a self-employed professional, is to approach a trustworthy financial adviser or broker with this issue. They may recommend getting a co-signer in order to secure a loan. Another option that is slowly becoming available is called asset depletion program. If a business owner can demonstrate substantial liquid funds, a mortgage bank will treat it as an annuity and calculate what monthly income this money can generate over 20 or 30-year period.