Getting a Mortgage as Self employed

Ok, if anyone has experience buying a house/land while 100% self employed, do tell. I have an Ebay business, and my husband is independent contractor for a building contractor. We file as sole prop lately, thought about starting an LLC. Anyways, how hard is it really to get a loan? We have basically no credit, I mean we buy with cash, but we'll be needing to get 2 lines of credit going just to build accountability. Our goal is to buy in the next 2 to 3 years. My husband just started working on his own. We like to keep good books, so I'm just wondering if the horror stories I've heard are actually people complaining about paperwork.

We bought our house as 100% self-employed people.  We financed it through the builder.  Our land, which we purchased for cash, was collateral for the loan.  I don't remember a ton of paperwork, I think they mostly wanted to see some tax returns.  This was over 20 years ago, though, so things have probably changed a lot since then.  

We initially tried to get a loan for both land and house but were rejected by our bank.  I can't remember exactly why but I think it might have been because the size land we wanted was more than they wanted to finance because less saleable than a house on less land.  I think these sorts of policies probably vary by bank, though there may be industry-wide standards of some kind which you might be able to dig up by searching online.

It is kind of difficult because you have to prove you can make what you say you do. This can be done through your previous tax returns. That is good or bad because as we all know, the self-employed (in my case a farmer), I can take some serious tax deductions. That gets me out of paying 35% income tax some years, but also shows the bank I did not make any money at farming.

If you are new at being self-employed, it is even tougher because you have to back up what you say by proving your assumptions, called that because they are just that...assumptions. But because you do not plan to buy in 2-3 years, you simply just have to watch your expenses, spend very little and show a pretty healthy income. Yep, you'll pay incomes taxes, but then you are more assured you will get the loan.

Your best bet is to get with the Small Business Administration and get free business counseling. I have done that for years and will meet with a business councilor I have had a relationship with for 8 or 9 years now this coming Thursday. I am not buying land, just expanding my farm, but that is what they are there for, to help people like us. More importantly they have a host of "tools", basically spreadsheet programs that you can plug numbers into and do the calculations for yourself. I got the numbers the bank wants to here, but what the councilor does in my case is, ask questions the bank will likely ask. That is invaluable..

I talked to her about a month ago and she wanted to know if my wife and I could handle 900 sheep (our proposed sheep farm) by ourselves? Honestly, I was not sure and I hate being asked a question I do not have the answer too...in other words I need better preparation before I go to the bank. So I created a spreadsheet, added in the required daily tasks and developed a 3 year plan calculating out daily how many hours the farm would require, and how many free hours per day we would have. Now by free hours I mean time spent to do field work like haying, marketing lambs, so not twiddling our thumbs, and by essential I mean cleaning out manure, feeding sheep, lambing times, shearing, etc. In the end, we averaged 6.9 hours per day in essential tasks. That is not bad, split between us that is only 3.5 hours out in the barn, the rest of the day to do field work and other tasks. Yet in 3 years, there is 9 days when we would exceed what I assumed would be a 12 hour work day. That means I was pretty accurate because those 9 days fell on Shearing Days, a VERY busy day for a sheep farm. So on those days we would either work a 16-18 hour work day, or get a volunteer for the day, or pay someone to help us for the day. The point is, My wife and I can do this. And thus with this spreadsheet we can make our case in a logical way to support that statement. This is the kind of paperwork required to satisfy banks.

Now I only say this in agricultural terms, but credit is not so important as collateral. For most farmers, that is what makes or breaks a deal. I worked with a friend who wanted to buy some land, but after adding up all that he needed, it exceeded the value of the 27 acres he was going to buy, so due to COLLATERAL, he was shot down. And if someone is buying a farm, they must look conservatively at the property. Those selling real estate (and making commissions off it) often think that those barns are worth a lot of money, but a barn is only worth around $10 a square foot. And if it is a fancy horse barn with a kitchen, bathroom, heated stalls, etc...yep, $10 a square foot. WHAT? Yes, just because someone spent money on something does not mean it will appraise as such. Many a persons dream of farm ownership has been dashed by a crappy appraisal. So collateral is HUGE. Fortunately for farmers, we excel at collateral. Livestock, equipment, mineral resources, forestry resources, all add up to incredible amounts, so it is possible to get into the high cost of farming after all. With a little creativity, loans can be secured with stuff other than real estate.

But there are a ton of institutions lending to farmers and for good reason. Since 2008 farms look pretty consistent over the long term, and as long as a bank can secure a loan by collateral, they are happy lending to fairly stable farmers. The Small Business Administration can certainly help you find those places. The USDA-FSA is another place, but they often have backlogs 2-3 years and few sellers are willing to wait that long for their money.

There is WAY more to this subject, and while I am no expert, just a dumb sheep farmer, I started out in 2008 with 4 sheep and 3 acres of land, and now have a few more acres, and far more sheep. The troubled waters can be navigated through creativity, back up plans of back up plans, and determination. If you have any specific question, I will try to answer them, but mostly it is to convey hope. Not false, flattering hope, but true hope.

I just did this and while it was difficult it is possible. The three most important things that I found are:
1. Strong Profit & Loss (Income) Statements
2. Have more than enough saved for a down-payment
3. Show decent income on tax returns

Your P&L should show your salary or "Guaranteed Payments" in it so the bank will know how much you make. This should match up with your bank statements. It's a good idea to try to keep your pay as consistent as you can and even better if you can have it gradually increase. It's not really a nightmare as long as you actually make enough money and have enough saved that your desired purchase is reasonable. Good luck!

John Natoli wrote:
Your P&L should show your salary or "Guaranteed Payments" in it so the bank will know how much you make. This should match up with your bank statements. It's a good idea to try to keep your pay as consistent as you can and even better if you can have it gradually increase. It's not really a nightmare as long as you actually make enough money and have enough saved that your desired purchase is reasonable. Good luck!

^This is pretty much my thinking.

Here is our situation: We live in an expensive area, but our business overhead is very small. A 800 sq ft house, somewhat fixer (not bad), on a moderate yard inside our small tourist town will cost about $200,000. As far as collateral, we're out of luck. However, we are just becoming much more efficient and building up relations.

For example, my husband now has a special relationship with his head contractor to where they can actually make a nice wage together, finishing bidded jobs ahead of time. He does not have to find his own work, the contractor brings in clients and feeds them to hubby. They almost function like boss/employee, except that being independent, he can work as much as he wants to without hurting the boss by going overtime. Basically, no one wants to pay their workers to go overtime. The contractor with employees typically just stretches the job out to last longer. At least, that is what has happened to my husband during the years he has worked as an employee of various companies. So, this situation creates a scenario where you can work as much as you want, basically, faster job completion = more jobs = more money. He doesn't have to buy building materials, that's the contractor's job, so basically no overhead.

In my case, I buy used goods to resell, so my overheard is higher. But the cost to sale ratio is lovely, so it's not a huge deal. I get all my shipping materials for free too. I'd like to eventually liquidate estates or businesses, or even try consignment.

I just figured we would stop trying to deduct stuff and bite the bullet of taxes so that our income would appear higher. There's a balance I'm sure.

Our plan is to work work work, bring in the dough and keep ramping things up every year by becoming uber efficient/building relations.

Hey Amy, so I'm no expert but what I have found is that it's not really about your tax returns showing a lot of profitability. You can still deduct stuff, as long as you're paying yourself a good salary. Your P&L can basically show your business as breaking even or even taking a loss, but one of those deductions is your own salary. As long as that's clear to the bank, that's what matters. Also, I would probably set up LLCs. They provide protection to you and therefor to the lenders. I would not feel comfortable running a business without that basic protection and they're very easy to set up. Again, just try to make it look consistent and professional. Pay yourself a steady salary and then if you can give yourself a bonus at set times of the year. The next year, evaluate if you're going to give yourself a raise and do it if you can. Make sure you have business bank accounts separate from your personal accounts. This is debatable but I'd say you should also make sure that your companies have a professional image with a logo, a website and letterhead. You can provide documentation to the bank on professional letterhead and they can reference your site and you will look much more professional. I'm biased because I run a branding and web agency, but I think it makes a difference. I got a loan less than a year out of a bankruptcy and with a house in foreclosure proceedings still under my name, so I really had the cards stacked against me. I'm paying for it in interest, but it is possible. The bank we used is call First National so you might want to check them out.

I had no problems, but my self employment is owning an incorporated business. I get a salary.