As a business owner, you likely know how to navigate the challenges of running a business, but applying for a home loan can present a whole new set of hurdles.
Understanding these common home loan application mistakes can not only save you time and money—but make the most of a home buying opportunity when it arises.
Here are five common mistakes business owners make when applying for a home loan—and how to avoid them.
COUNT BUSINESS EXPENSES TWICE
Does your business own the car you drive? One of the most common errors is including business expenses as part of personal living expenses. Many lenders require a breakdown of living expenses to assess your ability to repay a home loan. However, if you mistakenly apportion any business costs as personal expenses, they may be counted twice—once in your business financials and again in your declared living expenses.
Higher living expenses mean lower borrowing capacity, and potentially missing the opportunity to buy the home you have been searching for.
To avoid this, work closely with your accountant and mortgage broker to clearly identify your personal and business finances before submitting a loan application.
APPLYING TOO SOON AFTER STARTING A BUSINESS
Starting a business is an exciting journey, but it often comes with financial unpredictability in the early stages. This is why lenders prefer a two year history of business financial performance as part of their assessment checklist. Many business owners realise too late they may have been better off applying for a home loan before leaving their salaried position.
Applying for a mortgage while you still have stable income from employment, provided it suits your goals and objectives, requires careful planning. If it’s too late for that, focus on building a strong financial track record for your business before reapplying.
NEW BUSINESS DEBT IMPACTS BORROWING CAPACITY
While borrowing for your business can be a strategic move, it should be done with an understanding of how it affects your personal borrowing capacity. Business loans, lines of credit, or credit card debt can impact your borrowing capacity.
Before taking on new business debt, consider its implications and talk to a mortgage broker about any potential impacts on your personal borrowing capacity.
IMPACT OF OTHER BUSINESSES
If you’re a director of multiple businesses, your financial involvement in those entities can affect your home loan application. Lenders usually do a credit check as part of a home loan application which can reveal any directorships you hold.
Many business owners are caught off guard when lenders as for information about other businesses they are involved with. To avoid surprises, ask your mortgage broker to order your credit file upfront. A mortgage broker who understands complex business structures can be invaluable in getting a full picture of your financial position.
ASSUME LENDERS DON’T LIKE BUSINESS OWNERS
Some business owners believe that securing a home loan is nearly impossible due to the challenges of proving income or irregular cash flow. This misconception leads many to avoid applying altogether.
On the contrary, many banks are built for business owners. They can “add back” certain expenses, such as one-off costs or non-cash expenses like depreciation, to calculate your available income. Even if your business had an unusually bad year, lenders might consider it an anomaly if you provide evidence of overall stability.
Working with a knowledgeable mortgage broker who understands the nuances of lending to business owners can make all the difference. They can match you with lenders who are more flexible and experienced in assessing applications from self-employed individuals.
FINAL THOUGHTS
Applying for a home loan as a business owner requires careful planning and understanding of how your business structure and financial performance affects personal borrowing. By avoiding these five common mistakes you can position yourself for a successful home loan application:
- Double-counting expenses
- Applying too soon
- Taking on unnecessary debt
- Ignoring other directorships
- Assuming lenders are not approachable
With the right preparation and professional advice, achieving your homeownership dreams while running a business can absolutely be within reach.
DISCLAIMER: This is general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances, and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
