Getting Financed for a Construction to Permanent Loan…When You are Self-Employed!
Updated: Sep 29, 2022
In addition to not being able to find a lot we loved, concern over being approved for a construction to permanent loan because we were self-employed held us back from building sooner. After the market crash of 2008, which affected our part of the country very significantly, banks became very strict with their lending process. Gone were the days of ‘stated income’ and other lax lending standards. Everyone we spoke to told us the horrors of getting approved while being self-employed.
Before we even applied, we made sure our credit score was around 800, we had no debt aside from our cars, and we had almost double what we projected to need for closing cost sitting in personal savings. Having the money in personal vs. business saves you from having to prove that you can use the money without hurting your business. Also, we found a tax advisor who was VERY familiar with the tax code and how to use it to your advantage. The gentleman we found used to work for the IRS and has written a book to help small businesses best use the tax code. This is a major piece of advice! Find a tax advisor who is knowledgeable enough to help you set everything up correctly. Having him in our court helped us have all of our ducks in a row so that when we went to the bank, we had no issues regarding the income portion of our application
We accomplished this by working with our tax advisor to ensure we were balancing our write-off’s, which saved us money on our taxes, with showing enough income to get approved. We did not want to pay thousands of dollars in unnecessary taxes, but we also wanted to make sure we showed enough income a bank would consider us. Generally, if we had extra income in a year, we would go out and buy equipment or invest it to lower our tax bill. Before we applied, we ran everything through our tax advisor to make sure we did this in just the right way. If you are self-employed, you are probably or at least should be, familiar with the Section 179 write off. It enables businesses to take a very significant deduction for specific types of vehicles and business equipment. We use this each year to take quite a deduction as we purchase new vehicles, trailers, tools, etc. each year. However, we were able to get a letter from our tax advisor that this income could be added back into to our income.
Unfortunately, we did make one mistake that hopefully someone else can learn from. Because we are a sole proprietor, our personal and business income can get convoluted sometimes. We financed our vehicles with a bank separate from our checking and savings accounts. So each month I had to move money to pay them. I never paid that much attention to which account I used. At the end of the year, the vehicles are a business expense and, we’re a sole proprietor, so all the money is the same right? NO! Not in the bank’s eyes. So because I had used our "personal account" vs. our "business account" to make the payment, the bank considered them a personal expense and added them to our debt to income ratio! So we had to lower the car payments to get our debt to income ratio down. This meant paying my car off, which we didn’t owe that much on it anyway so not a major deal but when you are already paying 20k in closing cost you hate paying out even more cash! Regarding Daniel’s truck, at first we tried to refinance it into the business name but then discovered that cost $2,700.00 in unnecessary taxes. So we ended up just paying it down and refinancing it, so the monthly payment was low enough to qualify us. So it ended up costing us about $10,000.00 to fix the mistake of paying our vehicle payments from the wrong account! It was really for the best as it eliminated my car payment and lowered Daniel’s but if you are squeezing your money together for closing cost you might not have that extra amount, so hopefully, this piece of advice will help you!
Another piece of advice is to find a mortgage loan officer who is in your court. Someone who will truly understands your situation and will go to bat for you! We had an amazing loan officer! Anything she could do in her power to make something work, she did! And if she couldn’t, she helped me find a solution! What you can do to help your loan go through is be on top of it! If they ask for something, get it back to them ASAP. We ordered our appraisal on 2/12 and closed on 3/22- that is impressive in our county! My nickname may or may not have been ‘Squeaky’ with our mortgage company, as in ‘the squeaky wheel gets the oil.’ But it worked! Once I had emailed the processor to check on the progress a couple times and didn’t hear back for a few days. I texted my loan officer to let her know and within an hour had an email from the processor that she was only missing one signature and we were good to go. That simple! If I hadn’t pushed, it might have sat on her desk for who knows how long waiting for one signature!
So make sure you find a tax advisor to help you have all your ducks in a row before you even apply and find a loan officer who is on your team. Make sure to pay all business expenses from your business account and stay on top of the mortgage company, responding with anything they need as quickly as you can! If you do these things, getting a loan should be relatively easy, even if you are self-employed!