Qualifying for a traditional mortgage can be more challenging when an individual is self-employed. It wasn't always this way, but since the financial crisis, new rules came into place changing the requirements for business owners to purchase a home.

Here's a case study of to help you better understand the situation:

A few years ago, a business owner, who happened to be an owner of a restaurant wanted a mortgage. He actually owned a property valued at $950,000 at the time which was free and clear. He previously lived in New Jersey where he was a partner in a large scale business. He had purchased this luxury Florida condo several years prior with cash and eventually moved into it.

As an entrepreneur, he opened a new business which happened to be a restaurant. Soon after, he opened a second location. It seemed that his business was in a good position overall. However, when he wanted to obtain a mortgage to purchase another property, he did not understand why he kept being denied. In fact, he had been denied three times by three different banks beforehand.

When we spoke to him to better understand his situation, he explained his credit was overall good, he had two locations producing strong revenue and he was only looking for about a $300,000 to $400,000 loan and would pay the remaining balance in cash on another property he wanted to buy.

Since he was a business owner, we knew that mortgage underwriting would require two years of tax returns. When you are self-employed, a traditional mortgage will typically need two years of the personal tax returns and two years of the business tax returns. We discussed this with him, and reviewed his documents. While there was a good amount of revenue, he also had many deductions which were understandable considering he had rent, employees, advertising and food costs. These business expenses reduced his net profit and his bottom line did not show income enough to qualify for a mortgage.

Keep in mind that he also owned his current property, and had no plans to sell it. Even though that property was free and clear, he still had a monthly HOA fee and property taxes which had to be accounted for. In his case, the insurance was included with the condo HOA.

The bottom line was that he would not be able to qualify for a traditional mortgage.

Next, we examined his monthly revenue over a certain period of time. We noticed the monthly sales of even one location were a large enough amount that we could help him. Through a different program designed for business owners, we could avoid tax returns and focus more on the business cashflow.

We also focused on taking funds out of his current property. Since it was valued just below one million dollars and had no mortgage, he could easily take a few hundred thousand dollars from it and use the funds to purchase another property. That's exactly what he did as we helped him obtain a self-employed home loan!

While many business owners may have different scenarios, its important for our team to review each file individually. We can then provide the attention needed to help you with your residential financing needs.

Contact us to learn more about self-employed home loans and other residential mortgage programs to help you.