A Guide To Understanding Self-Employed Loans

There are 9.6 million self-employed people in the United States, and the number is projected to grow to 10.3 million by the year 2026. Self-employment is rewarding because it allows you to be your own boss, set your own hours, and decide on your own priorities.

The process of raising capital can be challenging for a startup business, and sole proprietorships may have the most difficult job of all. Within a sole proprietorship, all of the capital to run the company comes from the proprietor.

Though there are many advantages to being self-employed, it can be difficult to get the loans you need to buy a home or keep your business running. Even self-employed people need to fund their businesses, buy an office space, rent an office, pay employees, and eventually buy a home. However, traditional banks are often not interested in doing business with self-employed individuals.

If you are looking for an alternative to dealing with an unfriendly bank, it is a great idea to speak with a mortgage brokerage firm like Associates Home Loan of Florida that offers self-employed loans with flexible interest rates and repayment terms.

In this guide, the lending experts at Associates Home Loan of Florida explain everything you need to know about self-employed loans.

Borrowing When Self-Employed

It can be difficult to get a loan when you are self-employed because banks consider you to be a high-risk borrower. While your business may be highly successful, banks are still reluctant to fund people who have a historically unreliable income source. If you are self-employed, you will need to provide a great deal of documentation to your lender to make sure that you will be able to afford the payments and interest on your loan.

Secured Loans

Associates Home Loan provides a special service to its clients. The company accepts secured loans, meaning that if a borrower has equity in their home, they are able to borrow money. This is also known as a hard money loan. This is an excellent short-term solution for many businesses that are just getting started. Associates Home Loan does not require the intense scrutiny of your business’s financials in order to start the loan process. Instead, focusing on people with equity in an existing property allows the company to take a measured risk.

A self-employed loan allows borrowers to build their credit. Sometimes, lenders like Associates Home Loan are able to work with borrowers with lower credit ratings in order to get them the capital they need. This could involve submitting more detail on their financials before becoming approved.

Advantages of the Self-Employed Loan

When you are getting funding from a private investor, even a friend or family member, you are often beholden to them when making decisions for your company. If you receive a self-employed loan, you will retain complete control of your business.

Getting a self-employed loan can build your credit. Lenders like Associates Home Loan can provide an important service that allows businesses to operate more freely in the future. You may have plenty of questions regarding secured loans for the self-employed, here is a quick review of common questions we often receive:

Questions and Answers About Self-Employed Loans

Q: I just opened my own business, but my personal credit isn’t very good. Will I be able to get a loan?

A: Specialty brokers like Associates Home Loan will consider your application. It is less likely to happen if you go with a traditional lender.

Q: Is it a good idea to mix business and personal loans?

A: No, it is best to keep your business and personal finances separate as much as you can. You may need to get your seed funding with a self-employed loan partially based on your personal information, but as you build your business’s reputation, you should be able to rely on its merits to get funding in the future.

Q: How does a hard money loan work?

A: When you get a hard money loan from Associates, the loan will be based on the value of the property that you are borrowing against. Borrowers need to pay the principal plus any interest that accrues. If borrowers default, the lender can take the property.

Q: How can I raise my credit score?

A: Fortunately, there are many ways to raise your credit score. One of the methods that many self-employed individuals use is the cosigned loan. Having a cosigner means that the other party will be responsible for the loan if you default. Paying off one of these loans without any problems signals to the credit agencies that you are a lesser risk.

Monitoring your credit report is huge when it comes to raising your score. Often, credit reports contain significant errors. It is your responsibility to fix them, not the credit bureau’s responsibility.

Always pay more than the minimum on your loan and credit card balances. This signals that you are serious about paying off the loan and makes for much less interest in the end. Credit card statements now include information about how you can pay off your account in a much more prompt fashion when you pay more than the minimum balance.

Q: How can I calculate self-employed income?

A: While lenders typically average your net income from Schedule C of your tax returns for the past two years to determine eligibility for a mortgage loan, alternative approaches might be considered based on your unique circumstances. This is where the expertise of a mortgage broker like Associates Home Loan comes in. For more assistance and insights, read our recent blog on how to calculate self-employed income for mortgage loans.

What Do Traditional Lenders Look At?

Traditional lenders look into many aspects of your financial situation. You will be asked to provide documentation of your income, your current checking and savings account balances, your debt-to-income ratio, and your credit score. All of these factors will play into whether you are accepted to receive a loan.

Income Documentation

Income documentation is one of the most important aspects of getting a loan. If you do not document all of your income, there is no way that a lender would consider you for a loan approval. Since self-employed workers generally don’t receive W-2 forms, you would need to provide your lender with the information from your 1099 form. You will need to demonstrate that your income is consistent across a longer period of time.

In addition to your 1099 form, you need to submit your bank statements, payroll receipts if applicable, expense receipts, profit and loss statements, and your tax returns. This makes much more work for the lender than the traditional W-2 form, but it is necessary to check your financial health and that of your business.

Current Account Balances

Your current balances are important because your lender needs to know how much money you have to pay them. Simply listing your monthly income is not enough. In case you have a dip in your income, they will want to know whether you can cover your payments out of checking or savings.

Your lender will also be looking at the details of your checking and savings account. If you had a sudden large deposit in the last month, that might look fishy and trigger more investigation.

Debt-to-Income Ratio

Having a strong debt-to-income ratio is another crucial aspect of getting a self-employed loan. It is the unfortunate truth that many self-employed individuals have more debt compared to income than others. This is due to the fact that many self-employed people have had to use their personal credit cards to cover business expenses and to care for their families while they were getting their ventures off the ground.

Ideally, your debt-to-income ratio should be no higher than 45 percent. This means that you are spending only 45 percent or less of your monthly income paying off your debts. It is a good idea to pay off as much debt as possible before you apply for a loan. This will make your application much more attractive.

Credit Score

Traditional lenders will look into your credit score. Make sure that you are looking at your FICO score, not simply using the credit scores that are available on free credit score search websites. The three FICO scores come from Experian, TransUnion, and Equifax.

You should always check your credit report periodically to make sure there are no errors. Errors on your credit report could cause your debt-to-income ratio to look worse than it actually is. You should also check to make sure that you are the only person who has applied for and used your credit information to get a loan or card. You may have been the victim of identity theft without knowing it.

Business Expenses

Finally, a traditional lender will look into your business records. They will need to see any payroll reports you may have along with your profit and loss statements on a quarterly and/or yearly basis. It is a good idea to keep all of this information easily accessible, but it can be tedious to gather it all.

The Difficulties of Securing a Loan

Getting self-employed loans is more complex than traditional loans. You will need to show your lender your taxable income, not just your annual income. This is because self-employed individuals need to take out their own taxes from their income; there is no government withholding on 1099 forms. While it is a good idea to write off some expenses, writing off too many can lead to trouble because it can lower your taxable income to the point where it is too low to qualify for a loan.

Having an inconsistent income is also a problem for self-employed individuals. People with strong seasonal components to their jobs, or people like home flippers, will have swings in their income. It is best to save money while you are on an upswing to bolster your credit applications.

Getting Your Business Off the Ground

Unless you are independently wealthy, your business will need outside capital of some kind. Getting a self-employed loan can help you get your business started. Secured loans can be a huge help when it comes to building your personal credit and ensuring that you can keep your new business running.

Using Associates Home Loan as your lender will enable you to get quick and personal service. Getting a loan can be stressful, but we make it as easy as possible. When you work with us, we may be able to provide you with working capital or a home loan with the best possible terms for your credit situation.

Get in Touch with Us

If you are self-employed and looking for a loan, Associates Home Loan of Florida is ready to help. Getting a loan when you are self-employed is challenging, but we understand your situation and want to help.

Our services can be useful for self-employed people as well as others who may have trouble getting a traditional loan. Alternative loan options are available to help self-employed people and those with imperfect credit. You will be pleasantly surprised by how simple we can make the process of applying for a loan. All you need to get started is to fill out our easy online application form today.