Buying a House as an Entrepreneur
Buying a house when you are a business owner is totally different in so many ways from buying one when you are an employee. While the process might be the same, the mortgage industry seems to think you are riskier as a business owner than when you are an employee (which, of course – is total bullshit.) As an employee, you can get fired tomorrow and not have any way to make income until you get a new job – but our business owner clients always have a way they can figure out to make some cash.
An important thing to know about your process of buying a house as an entrepreneur is that your experience is going to be COMPLETELY different from people you know that are not business owners. So please don’t compare yourself (as with everything in your business, right?) to your friends/family that are not business owners. You will likely need to provide different information, your timeframe may be different and your communication with lenders will also be different.
Everyone’s journey will be a little different depending on how long you’ve been in business, the size of your business, the profits you have shown over the past few years, the structure of your business, how payroll is set up, and other factors.
Here are some steps that will be helpful as a starting point to guide you through this process:
GET CLEAR ON YOUR MOTIVATION BEHIND BUYING A HOUSE
You know that almost everything I talk about begins with mindset. So it will be no surprise that the very first step you need to do is sit down with yourself and/or your partner and have an honest conversation. Decide WHY you want to buy a house. Are you just falling prey to marketing, systematic and societal pressures that are telling you owning a home is the best option? Really think about your money story and dive into that.
Maybe you were told growing up that you are throwing money away if you are renting or you are only successful if you buy a home. But the truth is, that might be what works for you at this time in your life. If all of your assets are tied up in a house, it’s harder to move and it’s a big commitment. In many cities, renting may be the better way to go – and it may even be better for you tax-wise. The truth is, the market is set up to encourage people to buy real estate. Because white men think that makes you valuable. Think back in history, right? White male landowners had the power & the votes – and many people still think that way.
This will be the biggest investment you will make in your life so get clear for yourself on why you want to buy a house so that you are doing it for the right reasons – YOUR reasons.
PLAN LONG TERM
Start the conversation with a loan officer early – long before you are even starting to look at houses. It’s best to develop this relationship now (before there’s the emotion of falling in love with a house to complicate things) and have some honest conversions with them so they can share strategies with you. Remember that you are hiring this person as a professional to support you, so just like anyone you would hire in your business, you want to have conversations with as many loan officers as you need to until you find someone who you feel will be supportive of you through your home buying process. They work for you and you are in charge of the relationship. They should be your advocate to the bank and so you want to make sure you are working with someone who believes in you and will do that.
Buying a house is a big commitment and you want to work with someone who makes you feel great about the process, uses supportive language, and is used to working with other entrepreneurs. Don’t authorize them to start the process or pull your credit until you are ready to work with them. We are often asked for a referral for this, and I so wish we could help – but unfortunately, loan officers are licensed state by state so we don’t have recommendations – but ask any of your local entrepreneur friends to see if they have some referrals you can interview.
LEVERAGE YOUR LOAN OFFICER RELATIONSHIP
Once you have decided on who you want to work with as your loan officer, you will want to leverage that relationship with them so that they can work with you to get you into the optimal house buying position. The better a candidate you are, the lower your interest rate will be, the easier your underwriting will be and the smoother your closing process should be. And all of that will save you a bunch of money in the long run!
They can work with you on things like:
- Increasing your credit score, letting you know what specific actions you can take to increase those scores that the banks really care about.
- Structuring your business & its’ profits in a way that looks the most favorable to a bank. This may mean creating your S-Corp and getting you onto payroll ASAP, even if that might be a tax strategy you aren’t ready to implement quite yet.
- Calculating the down payments that will be required for the ranges of houses that you are considering.
- How you can show that your business is making great money in reality although that may be different ‘on paper’.
Every bank, and every lender will require different documents. We’ve helped many clients through this process and it’s looked different every time. We can’t talk to a broker on your behalf so it’s important you take control and do your research during this whole process.
In order to have your lender be able to make the best case to the bank for the mortgage, there is a sweet spot ( a year or two before you buy a house) that you want to be in. Maybe you need to show higher profit and be less aggressive in write-offs, or maybe you need to take more as wages and less as distributions. This might mean you are paying more in taxes but can get a lower interest rate, which is worth the pay-off for many people. Bottom line – there needs to be a strategy in place. This is an individualized strategy that the Empowered Profit team can help with based on your specific business and the conversations you have with your lender.
GET A PLAN IN PLACE AND SHARE THAT WITH YOUR FINANCIAL TEAM
The banks are going to be looking at your historical data. They don’t really care about your projected sales, they want proof, paystubs, and tax returns. They will use your credit score and tax returns to see your history with money. This also doesn’t mean anything about you as a person or as a business owner. It’s a reflection of where you have been, and where you are going is MUCH more important (just not to banks, lol)
Once you’ve had the conversation with your lender, and the bank and are clear on what you will need to show to them, share that information with your bookkeeper or accountant. Again, every situation is unique and we can’t tell you what you will need, but once you let us know what you will need and what they said, we can definitely support you in gathering the information for them. We will help you tweak your Profit Plan and Tax Strategy, with the information your lender shared with you in mind.
DON’T LET THE F*&CKED UP REAL ESTATE INDUSTRY MINDSET GET TO YOU
Finally – it all comes back to mindset, right? 🙂 The Real Estate industry is built on the idea of urgency, speed, and emotions – and making you feel like you are missing out on something. If you’ve ever been to an open house, you’ve probably heard things like – “oh, this one won’t last long” or “you definitely don’t want to wait on this one!”. Real Estate agents and loan officers are notoriously last-minute people.
I can’t tell you how many times I have received a call from a client ON THE WAY TO SETTLEMENT that a loan officer has asked for 3 or 4 additional pieces of information. This is so unfair. They are not respecting anyone’s boundaries and emotionally, you are so invested in this house that it really turns you upside down when they tell you more information is needed and you didn’t have enough time to gather it.
I want you to take a minute and look at your mindset during this whole process. Just like we advise you to do when looking at the finances in your business, staying emotionally unattached to this process is really key. These people are working for you. They may make it seem like the opposite and they will have you running around gathering things at the last minute. This isn’t going to change, it’s just how the industry works. So control your mindset. Know this going in and don’t be surprised.
When we bought our house, I had everything tracked and gathered and was really on top of it all. AND STILL at the last minute, they were asking for documents and making it seem like it was the end of the world. Don’t fall for this. Calmly get the list of what they need and don’t let it fluster you.
Something else to keep in mind is that most lenders and brokers are going to be men. This may trigger your money mindset issues and the messages you’ve received in the past about money or maybe even how you’ve handled your money in the past. Perhaps they don’t intentionally mean it, or maybe they are just assholes, but I have coached many a client through their loan officer calling their business a ‘cute side hustle’, asking why they just didn’t stay home with the kids for such little money, and other bullshit. I wish I was kidding. Remember it was in the 1970’s when women we allowed to purchase a home on their own without a man, and it seems in some ways the industry hasn’t evolved much since then.
MY TIPS IN A NUTSHELL
- Get clear on your WHY for buying a house – is this the best option for you? What’s the best timing?
- Start the conversations early and plan before you start looking
- Interview loan officers – it needs to be a great relationship & use them to your advantage
- Make a plan & share information with your financial team so they can help you
- Know that it could be messy, stressful, and last minute things and this doesn’t mean anything about you!
Want us to help you with this? Book a call with us today and we will help you get it all sorted out!
This is provided as information only and as a starting point for a conversation with your own legal and accounting team, this should not be considered legal or financial advice. All of these decisions are based on a number of factors and we cannot guarantee that you will experience any specific results based on any information provided. Please speak with your own retained professionals to ensure that you are making the best decisions for your business & personal situation.