Posts Tagged ‘personal finance’

Mortgage Challenges for the Self Employed

by Guy Ralfe on June 2, 2010

Another life lesson from my venture moving from the corporate world to self employment. So far a very liberating decision but filled with unexpected surprises. For the most part getting the business side set up and running has been relatively smooth, but personal finances have been a great challenge.

This has been made complicated by the fact that we are relocating to start the business, one of the drivers for making the change is to reduce the mortgage burden we have today by moving to a cheaper part of the country so that we did not overburden the business in its start up stages.

Having a solid credit score, 6 years of banking and mortgage history without any blemishes any yet when inquiring for a mortgage on a new house all the large banks would not even complete the application process because of being an entrepreneur  and self employed. Being self employed means the banks need 2 years worth of company trading records, P&L and Balance sheets. This requirement has been a result of the collapsed subprime market, but also driven by the fact that most banks want the option to sell the loans they originate to Fannie Mae and Freddie Mac. These two institutions, a little shy after the meltdown, have raised their criteria and this has flowed through the whole lending chain to the retail banks we approach for loans.

At first I found this very frustrating that I was being measured by the lowest common denominator, by someone sitting behind a computer asking yes/no questions until the computer told the operator to stop. Then I had a conversation with a good friend, he enlightened me to the reality of the current economic situation where so many people have lost their jobs and their only option has been to set themselves up as self employed businesses doing freelance work in their trade  – anyone can get a business incorporated and print business cards, but if they have not completed any regular business then they likely don’t have a secure business plan to lend against – thus the 2 years business record requirement.

During the application process, I began asking lots of questions and found this out about what it means to be self employed.

  • If you are listed as the owner of an incorporated company or LLC
  • If you have more than 15%  ownership you are self employed
  • Even if you have a regular salary, the fact that you are self employed means that you bring into the equation an element of risk in your ability to service a loan, until you have 2 years of accounting records to share.

If are thinking of relocating and are starting a new business, try and arrange some of your financing before you begin the new operation – loan officers prefer steady track records to the unsubstantiated hype of a new entrepreneur.

Another option is to explore local banks that originate and hold the loans themselves. While the general application criterion is much the same these banks take a little broader assessment of your projected finances for a sacrifice in interest rate.