If you’re running a home business, the thought of buying a home may be scary. You’re no longer getting those regular paychecks and banks can be difficult to work with. But careful planning and the right home-buying strategies can make home ownership a real possibility.
It Only Seems Daunting
You may think you can’t buy a home because you haven’t saved a large down payment or your budget isn’t the biggest—or both. Plus, your finances aren’t as easily explained as they were when you had several years of W-2s to show your history of earnings. Besides that, walking into a big bank can be intimidating. Many lenders want to focus on the easy loans, meaning those where the paperwork is simple and the borrower has a traditional set of financial records.
That can lead some home and small business owners to put off the decision to buy altogether because they don’t want to take the chance the bank will reject their loan application. If that’s how you’re feeling, keep in mind that a traditional bank loan is not the only way to buy a home these days. You may just need to go about it a bit differently. But first, make sure your business and finances are in order.
Structure Your Business Effectively
How you run your business will have an effect on your personal finances. Your goal should be to keep your business and personal finances separate, and to report your income accurately. After all, your financing will be based on how well your income can cover a mortgage payment, and how well your business will fund your income. If you aren’t making a clear distinction between your business and personal finances, people looking to help you pay for your home won’t be able to distinguish between the two. Here are some tips to make sure you separate your business and personal finances:
- Create a business checking account and use it to pay for all business-related expenses
- Obtain a corporate credit card to use for business purchases; that way, what you charge for work won’t affect your personal credit history
- If you need a loan for your business, obtain it in the name of your business, not your own name
- Set up reasonable compensation from your business that will help you qualify for a mortgage
- Pay for all your personal expenses through separate personal accounts
- Don’t expense too many things through your business; otherwise, you’ll tend to report a lower level of income making it difficult to qualify for financing
- Keep good business records; you’ll need them to obtain a loan
Increase Your Chances of Buying a Home
While you’re prepping to make a purchase, there are some things you can do to make it easier. Start with these tips:
Make a budget (and actually stick to it). Don’t overextend yourself. A potential lender wants to know whether you have the income to maintain your ongoing cost of living. Your budget should include all your living expenses, not just your monthly rent payment. Estimate costs as needed for things like property insurance, property taxes, HVAC, water, trash removal, lawn maintenance, HOA fees, and general maintenance.
Don’t purchase a home until your business is two years old. You need to wait that long to make sure your business is going to thrive. Besides that, if you do apply for a regular mortgage, you’ll need two years’ worth of financial data to submit with your application.
Limit your debt wherever you can. The more recurring personal debts you have to pay for, the less money you’ll have to spend financing your home. Restrict the number of active loans you have for things such as cars or furniture. If you need to finance office equipment, run that expense through your business.
Build your credit score. One of the first things potential lenders want to see is strong credit, so it’s critical to find out what your score is. If you’ve already got good credit, research what to do to maintain your high score. And if your credit falls in the not-so-good category (usually 600 or lower), there are a range of strategies for improving it, including making timely monthly payments and paying more than the minimum.
Save for a down payment. Historically, buyers needed to put down 20 percent of the value of the home as a down payment, but nowadays, that’s not always the case. You could qualify for a traditional mortgage with a lower down payment requirement. Or, you could decide to take advantage of new financing options, like co-investing, where you’ll only need 10 percent to start, and your payments will be lower, too.
Find alternatives to a traditional mortgage. In today’s market, there are ways you can finance your home without using a lender at all. One option is using a co-investment model, like Haus. Instead of taking on debt, a company pools their money with yours and helps you buy your home. You’ll share a little equity when you sell, but your monthly payments will be much lower, 30% less than a mortgage on average. Spend a little time researching to see if there’s a financing option that fits your lifestyle better than a conventional loan.
Look for a home that meets your needs as a business owner. This isn’t the time to buy a fixer-upper, so look for low-maintenance homes. After pouring your time into the business, you won’t have much left over for DIY repairs and renovations. Besides that, an energy efficient home will help you reduce your monthly bills.
The Bottom Line
You don’t need to give up on the idea of owning your own home or purchasing a new one. As a home business owner, you’ll just need to use the right strategy to make sure that you can buy a house without making mistakes or straining your budget. All it takes is a little financial planning and research to find the path to home ownership that works best for you.
