Buying a house as a business owner offers numerous perks, including setting your own hours, choosing your clients, and having time for friends and family. However, there’s one aspect they don’t often tell you about – the challenges of securing financing due to tax considerations. In this article, we’ll explore why this happens and provide you with valuable tips and financing options to navigate the process successfully.
Why is financing difficult?
Why does financing become challenging for business owners? When you file taxes as a business owner, you typically use various expenses to reduce your tax burden, especially if you’re classified as a 1099 independent contractor. While this strategy helps lower your taxes, it can make it appear as though you don’t earn much money on paper due to deductions. Explaining this situation to banks during the financing process can be quite a challenge.
What can I do?
What can you do to overcome these challenges? To increase your chances of securing financing, it’s crucial to have all your documents in order. Banks will typically request three months of bank statements and the past two years of tax returns.
Bank Statements
One common mistake among business owners is not having separate bank accounts for personal and business use. By opening a dedicated business bank account, you’ll simplify the explanation process for the lender, as it becomes easier to differentiate between personal and business expenses. Trust me, having a separate business bank account will save you a lot of headaches in the long run.
Tax Returns
Business owners often encounter issues with tax returns in three scenarios:
A. Unfiled returns: If you haven’t filed your returns, it’s essential to rectify this situation promptly. While it’s possible to try and secure financing with unfiled returns, complications are almost guaranteed once you enter the contract phase. Contact the Kodiak Bear Group, and they can help you find the assistance you need to resolve this matter.
B. Lost returns: In case you misplaced your tax returns due to a move or any other reason, you can obtain copies from the IRS. Visit their website to learn more about the process. Alternatively, reach out to your CPA or tax preparer if you’re still in contact with them, as they may have copies on file.
C. Owed taxes: If you owe taxes, it’s crucial to develop a payment plan and take steps to settle the outstanding amount. Ignoring the issue will only compound the problem. It’s best to find out where you stand to avoid potential setbacks during the underwriting process. Remember, knowledge is power, even if it’s painful at times.
Assets and Cash
If you plan to use business funds or assets for the house purchase, you must ensure these funds are readily available:
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Cash: Deposit any cash intended for the purchase into the bank account you’ll be sharing statements from. Lenders will inquire about reserves and available funds, so it’s vital to have them properly documented.
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Assets: If you have assets like cars, trucks, machinery, or stocks that you plan to use for the down payment, consider selling them in advance. This allows the funds to be readily available for the purchase.
Your Financing Options
Exploring Financing Options: Now that we’ve covered the essential groundwork, let’s explore some common financing options available to business owners:
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Conventional (Bank Offered) Program: This standard conventional loan is available to business owners and offers various down payment options ranging from 10% to 20%. Interest rates are determined based on personal credit. The conventional program is the most commonly used option among business owners.
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FHA: Although commonly known as a first-time homebuyer loan, the FHA program is also available to business owners. Income requirements may be more stringent compared to W-2 employees, but it provides the benefit of a low 3.5% down payment option. Interest rates are based on personal credit scores.
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3rd Party Owner Financing: This creative solution involves investors and finance companies offering financing on behalf of the property seller. You, as the buyer, will purchase the property from the investor. It’s a viable option when you don’t have all the necessary documents but have the down payment. Down payment requirements typically range from 15% to 25%, and it’s essential to thoroughly research and question the involved companies, as fees and interest rates may be higher than the market average.
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Bank Statement Program: Under the bank statement program, lenders evaluate your bank statements to determine your affordability. This option requires the least number of documents. Down payment requirements are likely to be around 20%, and interest rates might be slightly higher due to the perceived higher risk.
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Owner Financing: In traditional owner financing, the seller acts as the bank, providing financing directly to the buyer. This option offers the most flexibility, as the down payment, interest rate, length of the loan, and required documents vary from owner to owner. However, it depends on the willingness of the seller to offer this type of financing.
Conclusion
These are just a few popular financing options available to business owners; there are many more depending on your circumstances. It’s essential to explore the choices that best suit your needs. When you reach out to us at the Kodiak Bear Group, we can guide you through the different options to determine the most suitable one for your situation. Contact us here to learn more and embark on your journey to homeownership as a successful business owner.
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