Getting a mortgage when self employed can be tricky. If you own a business and have a loan for it, and you are planning on buying a home, you might be wondering if the business loan will affect getting a mortgage. A business loan can impact your credit score. And if you are the sole proprietor of the business and take out the business loan in your name instead of the business’ name, that may cause issues.
How Business Loans Affect Your Credit
A business loan that is in the name of the business is not typically figured into the math when a mortgage lender makes its decision. But there are some situations where it can impact your credit. If you are the sole proprietor of the business your business loans will have a more significant impact on your personal credit.
One way they can impact your credit score is if you have to personally guarantee your business loan. This is because if the business does not make payments on the loan, you personally are responsible for making the loan payments. In this instance, you are the co-signer of the loan. So the debt can show up in your credit report.
If you use business credit cards to help fund your business, these can also impact your credit score. Especially if you are the sole proprietor of the business. This means your personal credit can be the same as your business credit. Any payments you make for your business loans and credit cards can help build up your personal credit. But missing payments will hurt it too. And the business debts held in your personal name will be counted against you in your debt ratio when applying for a mortgage. Which is why having a business name and taking out the card under the business name is important.
Salaried But Expensing Business Expenses
Some people work for a business as an employee on a salary, and use their personal credit cards for business expenses. They get reimbursed for the charges later. However, even if you get that money back later, you are still running up large balances on your personal credit cards now. This can greatly impact your personal credit score and debt to income ratio. If you do this, you should consider speaking to your employer about getting a credit card in the business’ name so that your business expenses will not impact your credit score and your debt ratios.
To keep your business and personal credit scores separate, you can make your business an LLC or a C or S Corporation. That will ensure the two are not intertwined and should not hurt your personal credit. Then take out any business credit under the business’ name to keep it separate from your personal credit so it cannot impact a mortgage application.
How to Get a Mortgage with a Business Loan
There are a few things you can do to make it easier for you to get a favorable mortgage loan when you have a loan for your business.
Avoid Business Loans If Possible
If a business loan is not critical to keeping the business growing or running, try not to get it until after you have secured a mortgage loan. This way it won’t impact your chances of getting a mortgage.
Business Loan Alternatives
There are some other business financing options that you can look into. Invoice financing is an option that allows you to get an advance on an invoice from one of your suppliers without waiting for them to pay it. This kind of financing usually has a fee of two to five percent. There are also merchant cash advances, which are not quite loans. They are a cash advance on the credit card transactions for your business based on data from the last year. These can help you get financing without getting a formal business loan.
As you can see, getting a mortgage is a complex process. It is always good to talk to a mortgage loan officer. Contact Brian Martucci to discuss your scenario in more detail.