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Chances are that the mortgage process has changed dramatically since the last time you bought or refinanced your home. On account of the financial crisis of 2008, additional documentation and analysis are now the norm when applying for a loan. The best way to take advantage of current low rates is to understand the additional preparation and requirements for a self-employed borrower. We present the top six issues we typically encounter when helping business owners.
1. The answer to every question is, “It depends.”
To save time and decrease anxiety, work with a mortgage officer or banker who knows you. Because every situation is different, your banker has a head start on knowing what questions to ask and what scenarios might be best for you. For example, if you are seeking a mortgage above $417,000, the number of rules and potential complications for these “jumbo” loans also increase. Your mortgage officer or banker may also have access to your information so they can assist with submitting documents such as bank statements, deposits and sources of down payment.
2. Your business accountant and banker play an important role in the process.
To help determine income and cash flow during the underwriting process, your accountant and banker are often called on to explain specific line items on your tax return, inter-company receivables and loans that may show as debts. Say you have a loan maturing or line of credit renewing in less than a year; expect to be questioned on your intent upon renewal or maturity date. There are myriad issues requiring more detail, and every situation is different.
3. Late payments can quickly damage your credit score.
Even medical practices and local utility companies report late payments to credit bureaus. If you’ve paid a medical bill late because you were waiting for insurance or missed a utility payment, this can significantly affect your credit score and add cost via a higher rate. Business owners have been surprised to discover how this influences their credit score. To avoid these surprises, check your credit score annually. AnnualCreditReport.com is a legitimate site that provides a free credit report from each reporting agency every 12 months.
4. If you’ve been a victim of fraud or identity theft, additional verification may be required.
Fraud victims are often advised to place a “fraud alert” on their credit report to alert potential creditors or lenders and prevent additional problems. In such a case, your records are locked to any third party requesting credit information. The same holds true if your confidential records were breached at the IRS. You will be responsible for approving and releasing the records to give access to the lender.
5. Do not make large purchases on credit after you submit your loan application.
About five days before your loan closing, a ”soft” inquiry is made, meaning your credit report is rechecked for any recent changes. This will not affect your credit score, but it could change your loan amount and rate if you used credit for large purchases such as furniture, electronics or a car during this period. Either use cash or wait until after the closing.
6. The entire process could take 45 days, 60 days or even longer.
The more complicated the situation, the longer it takes. Because there are so many variables with a self-employed borrower, the underwriter is likely to request additional information and explanation – another reason to start the process early by applying for a pre-approval, which can be done online.
Chances are you now have more questions. That’s why we strongly encourage you to start the process by having a conversation with a mortgage officer who knows you and is experienced with self-employed situations to help you through the process. Prepare for your meeting with these five tips to set realistic expectations.
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The ideas presented herein are for educational purposes only and are not intended for underwriting purposes or for credit decision-making, and refer to conventional conforming residential mortgage loans. See a mortgage loan originator to discuss details specific to your situation. Park Bank is an equal housing lender and a member FDIC.
