If you own your own business, you must document your income, as well as the income of your company. The lender will want to be confident that your business will not go under, leaving you without a job.
If you own your own business, it may be better to represent yourself as an employee of it as opposed to the owner.
Example: John bought a business several years ago. To celebrate, he decided to buy an expensive car. He wanted to finance part of the purchase price and proudly put down “owner” where the loan application asked for his title. The finance person at the dealership made him change it to “manager.” He then got a letter from the company accountant saying that he worked for the company and stating his salary. Since no one checked the tax returns, no one questioned him, and he got the loan. It would not have been this easy if he applied for a mortgage loan.
One of the oddities of mortgage approval occurs in the area of small business ownership. John, who bought the car, worked for the same company, whether he owned it or not. If you are a salaried employee of a company and show that you have been there for three years, you are considered a pretty good risk. There are seldom questions about how long the company has been in business and whether it is financially sound. No lender would consider asking a company to open its books before giving an employee a loan. If you show that you own a three-year-old business, you have to prove that it has a good chance to stay in business for the foreseeable future.
From the lender’s perspective, there are additional risks in being an owner. The main one is debt. If you lose your job, you look for another. You may have to live off savings or even credit cards for a while, but that ends as soon as you find suitable employment. In most cases, owners of businesses will hang on long after they should have given up. They will beg and borrow from every possible source before finally closing. Once they finally do close the business, many are so far in debt that bankruptcy is the only answer. They may have borrowed on second or third mortgage loans. Since they know that they cannot pay on them all, they do not pay on any and foreclosure results.
Lenders understand these risks and do what they can to ensure themselves they are making a good loan. So, if the lender knows you are the owner of a business or if your business is such that you have no choice but to reveal that fact, be prepared to provide a lot more documentation.
If your business shows an increasing profit over the years and a seemingly bright future, gather both your individual and company tax returns for the last five years (or as long as you have owned the company if less than five years). As with the commissioned salesperson, document the seasonal aspect of your business if this is appropriate. If you are putting up a substantial down payment (20% or more), the lender may look more to the property for repayment than to you personally.
Both a high credit score and a large down payment will almost certainly get you an approval, unless your business is very new or very shaky. You still may have to pay a little higher rate than if you were a salaried employee. The second option is the easy one. Find a lender that does not require an examination of your business. These loans go by various names, such as easy qualifier, stated income, low doc, or no doc. There are differences between them, but the common element is that your income documentation is less. In the easiest ones, they simply take you at your word.
Again, your credit score and down payment will play the major roles. Lenders want to make loans. However, they do not just hand out money without regard as to whether it will be repaid. If you want them to ignore one aspect of the qualification process, such as income, you must be especially strong in the other areas of credit score and loan-to-value ratio. Another option may be an FHA or VA loan. If you and the property qualify, you will find a more liberal underwriter. You will still need your documentation, but the guidelines for approval will not be as stringent. Lenders now require you to give them permission to get your tax returns from the IRS. If they do not match the ones that you gave them, you will get rejected for the loan. You also may be criminally prosecuted for falsifying the returns. It is so easy with modern technology to make unnoticeable changes on documents that it is sometimes tempting to add a little income. Simply put, do not do it.
Your credit score and down payment will play a major role in the approval process. If the lender believes that you are personally reliable because of your high credit score, it will help greatly.