While being a business owner can bring you great financial success, it can also come with a unique set of challenges – one particular challenge being buying a home. Owning your business may have helped you walk away from your job, bring in six figures, and save for a down payment, but entrepreneurs’ unique circumstances force them to approach the home buying process differently. However, don’t let the extra steps deter you from reaping the benefits of your success and achieving your dreams of purchasing a home. It all starts with understanding the mortgage process and fine-tuning your finances. Continue reading for everything you should know about preparing for your finances to buy a home as an entrepreneur.
Prepare for mortgage requirements
Anyone who applies for a mortgage needs to meet a certain set of criteria in order to qualify. There is a minimum credit score required for each type of mortgage, a necessary proof of income and employment, and more. Since entrepreneurs’ incomes are relatively unpredictable, and since they have to balance business finances with personal finances, lenders perceive entrepreneurs as riskier borrowers, and the application process can be much more difficult. This means that you should keep diligent records of your business’ finances and keep them separate from your personal finances. You may be asked to provide:
- Business tax returns
- Personal tax returns
- A profit and loss statement to prove a consistent profit
- Proof of income
- Proof of self employment
Pay down debt
Debt is one of the most significant factors in determining your eligibility for a home loan. An overwhelming amount of outstanding debt can rule out a mortgage entirely. But, know that lenders understand that everyone has debt – it’s how much debt compared to how much you make that matters. Experts use a certain measurement called a debt-to-income ratio to decide if you owe too much money to take on another major loan like a mortgage. Lenders typically seek a debt-to-income ratio of less than 50% for conventional loans, while government-backed mortgages like FHA loans often call for a DTI below 57%. If you have too much debt, work to get rid of high-interest loans first, and make payments consistently on time so that it doesn’t affect your credit score.
Choose the right neighborhood
When you understand how much you can spend on a home, it’s important to consider where to start searching for potential homes. The neighborhood where a home is located will directly affect what size home you can afford and your quality of lifestyle in that area. Once you determine that this neighborhood suits your lifestyle and children in the long run, ask yourself: is this city suitable for my business and my children? The best cities for entrepreneurs have a healthy economy, active consumers, the right customer base, and other thriving businesses. Be sure to weigh the business and personal factors equally, as both will influence your ability to prosper in that area.
Be strategic with timing
The timing of each step in the home buying process dictates how smoothly the experience will go. The day, month, and season you’re in can influence the availability of homes, their prices, and interest rates. Winter tends to be the cheapest season to buy a home most of the time, but you should also take a look at market conditions, interest rates, and other external factors. As an entrepreneur, you’ll also need to think about the timing of your move since you’ll likely be taking time off to pack, travel, and unpack. Think about the most appropriate time of year to be away from your business and be strategic about when you make an offer or move in.
Start saving
It’s important to begin cushioning your savings months, or even years, before kickstarting the home buying process. In competitive real estate markets, you will need to be in the best financial position in terms of credit health, mortgage preapproval, and savings. Those who can provide a hefty down payment often have an advantage over other buyers. Depending on the situation, many experts recommend saving up to 20% of the cost of your desired home for a down payment, which can take years to save up for. Set up auto-deposits into a savings account to put toward your home and keep it separate from your business accounts. Lifestyle changes, side hustles, and downsizing can also help you cut back on spending and allocate more money to your home buying fund.
Being a solopreneur, single mom, or first-time home buyer all at the same time can present many obstacles for you. When you take the time to research, strengthen your finances, and stay diligent throughout each step in the process, you can buy a home like a pro without taking a hit to your business.
About Aisha
Aisha Taylor is a single mom of twins, personal financial coach, work from home entrepreneur, and #1 Amazon Best Selling Author of the books “First Class Life Devotional: 35 Stories of Phenomenal Faith During Turbulent Times” and “5+5 FNPhenomenal Ways to Save $100 This Week Without Killing Your Lifestyle.” Aisha has been featured in ESSENCE, Jet Magazine, and Black Enterprise. She is also the Founder of FNPhenomenal, a movement designed to help corporate moms create their exit strategy from corporate by turning their ideas into income!
Instagram/Twitter/Pinterest: @FNPhenomenal
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