If you have just launched a startup and are simultaneously also applying for a mortgage, you will know that balancing the demands of growing your new business while seeking approval from mortgage lenders can be particularly daunting.
However, securing a mortgage is achievable with the right preparation and understanding of what lenders are looking for.
This article explores the types of mortgages available for startup founders, the requirements for applying and strategies to enhance your chances of approval.
What Type Of Mortgages Can I Get If I Have Just Launched A Startup?
When you're self-employed and have just launched a startup, traditional mortgages might seem out of reach due to inconsistency with your income and your new business having a limited financial history. However, there are specific mortgage options that cater to self-employed individuals.
These loans are designed for business owners and freelancers. They require more documentation during the application process but offer flexibility when it comes to assessing your income.
What Are The Requirements For A Mortgage Application If I Have Launched A Startup?
Applying for a mortgage as a self-employed individual or startup founder involves stricter documentation requirements compared to salaried employees. Here’s what you typically need:
- Proof of Income - Lenders generally require at least two years of tax returns, profit and loss statements and sometimes future income contracts.
- Employment Verification - This can be confirmed through letters from clients, a licensed CPA, business licenses, insurance or DBA certificates.
- Credit Score - A high credit score can significantly improve your chances of approval. Aim for a score of at least 700.
- Down Payment - A larger down payment reduces the lender’s risk. While 20% is standard, offering more can enhance your approval odds.
- Debt-to-Income Ratio (DTI) - Lenders prefer a DTI of 43% or lower. This ratio compares your monthly debt payments to your gross monthly income.
How Long Do I Need To Wait After Launching A Startup To Apply for A Mortgage?
Lenders typically prefer that your business be established for at least two years. This period allows you to build a stable income track record and demonstrate your business’s viability.
However, if your startup has been operating for at least 12 months, some lenders might consider your application, especially if you can show consistent earnings and a strong financial history from prior employment in the same field.
What Do Lenders Consider For Mortgage Approval If I Have Launched A Startup?
Lenders assess various aspects of your financial profile when considering your mortgage application:
- Income Stability - Demonstrating consistent or growing income over the past two years is crucial.
- Nature of Business - Startups in stable or growing industries might be viewed more favorably.
- Financial Strength of Business - Lenders will look at your business’s overall financial health, including savings, investments and other assets.
- Future Income Potential - Your business's ability to generate sufficient income in the future is a key consideration.
How Can I Improve My Chance Of Getting A Mortgage If I Have Launched A Startup?
To enhance your chances of getting a mortgage after launching a startup, there are several strategies you can implement. First, focus on improving your credit score by paying down debts, avoiding new credit inquiries and correcting any errors on your credit report.
Where possible, save for a larger down payment; the more you can put down, the less risky you appear to lenders. In addition to this, try to work on reducing your debt-to-income ratio by paying off outstanding debts. Keep your business expenses separate from your personal expenses by using different accounts and credit cards, which helps present a clearer financial picture to lenders.
By being meticulous with your financial documents and ensuring all records are accurate and up to date, you can improve your chances for mortgage approval. If you don’t already for your startup, consider hiring an accountant to assist with this.
What Mortgage Alternatives Are There If I Have Launched A New Startup?
If applying for a traditional mortgage with your newly launched business remains difficult, consider some alternative avenues that could help you get approval for your mortgage application:
Bank Statement Mortgages
These loans consider your bank statements over a period (usually 12-24 months) instead of traditional income documents. They are ideal if you have irregular income patterns.
Co-Signer
A co-signer with a strong financial profile can significantly improve your chances of mortgage approval. However, it is essential to choose a co-signer who fully understands the responsibilities involved, as they will be equally liable for the debt. This arrangement can be particularly beneficial if the financial history for your startup is short.
FHA or VA Loans
These government-backed loans offer more flexible qualification criteria. FHA loans require lower down payments and credit scores, while VA loans are available to eligible veterans and active-duty service members.
Although securing a mortgage as a new startup founder can be challenging, understanding your options, preparing the necessary documentation and building a strong application can make it achievable. Focus on building a solid financial foundation for both your business and personal life and you will be well on your way to get a mortgage.
