Welcome to Part 2 of our review of the new lending and borrowing landscape. As a reminder, in Part 1 we focused on how today’s new lending guidelines affect personal lending and borrowing for virtually anyone seeking to borrow funds (Click here to read Part 1). Now, let’s shift our attention to how the new lending environment affects personal lending and borrowing for people that are business owners and investors.
Whether you’re an employee receiving a steady salary and a W2 from an employer, a self-employed business owner, or even an investor, the basic premise for acquiring a mortgage or personal loan is the same—it’s a lot harder than it used it to be. But business owners and investors typically have even more layers of qualification requirements and historical documentation. Lenders today must comply with a complex, multi-layered maze of due diligence steps to ensure that every penny of business income and expense and investment gains and losses are accounted for. They also have to gather the information necessary to determine if income and loss patterns are consistent enough over time to rely on for future projections.
So, don’t be surprised when your lenders ask you to turn around and place your hands against the wall so they can frisk you to see if you’ve stashed some loose change in your pocket. All kidding aside, business owners and investors are now required to disclose every asset, liability and transaction with complete transparency and thorough documentation. Full federal tax returns including all schedules must be submitted. This includes schedule As, schedule Cs and schedule Es for real estate holdings, partnerships and anything else that produces a K1.
Something for business owners to consider…
If you’re a business owner trying to qualify for a mortgage or other type of loan, you are required to submit two full years of tax returns. So, if your business is new, or has not been profitable recently, and that business is your primary source of income, there’s a good chance you’re not going to qualify. My point is, if you’re going to start a new business, be sure that you’re either not planning to move or borrow money for a few years (until the business has proven successful for a couple of years), or you have enough other income and assets to qualify regardless of the status of that business.
Also, if you’re planning to use business assets or funds for down payments, your accountant will be required to prove that taking that money out of the business won’t threaten the viability of the business. CPAs are frequently uncomfortable taking on that responsibility.
Something for passive investors to consider…
Even if you are a passive investor in a business trying to get a personal loan or mortgage, you could be affected by today’s strict rules. For example, if your investment represents 25% or more of business ownership, you will be required by Fannie Mae and Freddie Mac guidelines to provide the full tax return for the entire entity—and guess what… some organizations won’t be too happy about that.
Get with an expert and plan
Here’s my advice. If you think that you’re going to want or need to apply for a mortgage or other type of loan in the future, meet with your financial advisor first and develop a plan together. Due to the stringent and complex nature of today’s lending and borrowing guidelines and requirements, qualifying for loans can be frustrating, cumbersome and downright difficult. Even if you think you’ll easily qualify, there are new obstacles and stumbling blocks that weren’t there a few years ago. A good financial advisor will start by understanding your needs and goals and finding out the exact requirements for successfully acquiring the appropriate loan. He or she can also help predict potential issues and help you take some proactive steps to optimize your borrowing profile and minimize the hassles and cycle times of the approval process. The further ahead you can start planning, the better.
Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.
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