SIX Things Business Owners May Need When Buying a HomeFeb 23, 2023
Today we’re talking about buying a house, specifically as an entrepreneur and business owner. My husband and I are personally in the process of buying a farmhouse on 75 acres, and I have a couple clients going through the home buying process as well!
Getting a mortgage (or any loan) looks a little bit different because you’re not a W2 employee, with that consistent or regular income. I have a lot of photographer clients, and with them or any business your income month to month can fluctuate. Whether you’re buying your first home, looking to upgrade, or buying to rent or host on Airbnb, here are 6 things you might need when you get ready to buy a home. Your lender might require more or less information, but this is a good place to start.
Your Business Description
As a business owner, when you go to qualify for a mortgage they’re going to want the basic details of your business. This is kind of like your elevator pitch, except obviously you’re not selling to them. But they need to know what you do, what you sell or offer, how your business is structured, etc. They want to see how long you’ve been in business and if your income has been consistent overall. Pretty simple.
Tax Returns from the Last Two Years
If you are an LLC or sole proprietor, that goes on a Schedule C. It gets attached to your personal tax return, so it's all in one place. You just give them your personal tax returns from the last couple years.
But if you're an S corp, then you have two different tax returns. You have a business tax return, and then you also have a personal tax return. They would most likely require both of those. So, You'll need to have your tax returns available. If you don't personally have them, you can ask your account or your CPA, but you really should make sure that you store them and keep track of them, so that you can quickly give those to your lender (or for some reason if you ever need them).
Six Months (or more) of your Profit + Loss Statements
With this, they want to see month over month how your business is performing, how your income's going, the different trends, etc. There might be different fluctuations month over month. I work with a lot of photographers or other creatives and those businesses tend to have up and down months, where some months are higher revenue than others.
So they want to see those, see how we manage that. They want to see how we respond as business owners on what we do with that money, how we are handling the high and low months. For that reason, they might want to see six (or more) months of your Profit and Loss statements.
Most Recent Balance Sheet
The reason why they need the recent balance sheet is because they want to see your assets and liabilities, and the debt to equity ratio. All that's saying is making sure that you don't owe a bunch of money and that everything is going to balance out. They're obviously not gonna give you a giant mortgage if you have a ton of debt and not enough money or income to pay it.
Again, this is not me saying that debt is bad. I'm just saying they are going to look for the debt to equity ratio and make sure everything balances out. That they are giving out their mortgage and approving you knowing that you are going to be paying those monthly bills.
Two Years of Bank Statements
This is one that I'm not sure everyone's going to be asking for, but 24 months of bank statements. If you have an accurate profit and loss and accurate balance sheet, I don't really see why this is necessary. But I have heard that this is something that they do require sometimes to just kind of go back and see how much money you're bringing in and how much expenses you're taking out of the account.
This is another great example why we need to have separate bank accounts for our personal and business expenses. They're going to want to look at your business accounts to see how that lines up with the profit and loss and the balance sheet. When its separate from your personal finances, it makes things much easier for everyone involved.
Your Pre-Approval Letter
As I said, we’re currently in the process of buying our farmhouse. First, we had to sell our current home. That whole process was crazy, and I can’t speak highly enough about our realtor, Mary. She’s been in the industry for many years and took care of literally everything to list and sell our house. If you’re thinking of selling on your own without a realtor (we entertained the idea for a minute and it was not a good idea), just get the realtor.
Anyways. After showing our house for a couple days we had multiple offers come in, which was amazing. From a seller standpoint, we could’ve picked the highest offer. But we also looked at if the potential buyer had their pre-approval letter. Why? Because that meant there was less risk of the offer falling through and us having to list the house again.
And by the way, if you go get pre-approved, Does not mean that you need to spend that much money. So , just because they're saying you were pre-approved for something, you need to make sure it makes financial sense for you to be able to make those monthly payments to your mortgage.
Key Takeaway: Keep your Bookkeeping Up to Date
As you can see, there’s a lot of financial information you’ll need to provide when you go to buy a house. Which makes sense, since the bank is letting you borrow a large sum of money. They want to make sure you’ll be able to make those payments and they’ll get their money back. Even if you’re just thinking about buying, or if you want to get a different type of loan, you’ll need this financial information for your business.
If you go to your lender and they say, “Hey, by the way, we need six months of profit and loss statements.” Are you really going to be able to do that within 6 to 12 hours? Probably not, and there’s more likely to be mistakes. And lots of stress. If you don’t have your books up to date, you may not even have your tax returns filed from previous years. So not only does it impact your ability to qualify for a mortgage but you don’t even have a clear picture of what you can afford.
On the flip side, you could be like my clients with their books up to date and accurate. All they had to do was go pull up that P&L from our monthly report emails we send out. They pulled up whatever reports they needed, sent it in to their lender, then got pre-approved. Everything good to go, seamless, and stress free.
Have any questions? Feel free to send me an email or find me on Instagram. I’d love to connect!