Financing a Homestead When You’re Self-Employed: What Traditional Banks Don’t Tell You

If you work with large equipment or enjoy cultivating land, you know the appeal of homesteads. But if you’re self-employed, it may be harder to visualize how you can go about financing one. And traditional banks may not be eager to work with you if you don’t have a consistent income. 

Fortunately, there are alternative lending solutions if you’re a contractor, short-term rental host, or other type of entrepreneur. Read on to learn what traditional banks don’t tell you about borrowing money, and how you can find success financing the homestead of your dreams. 

The Challenges with Traditional Mortgages

When you apply for a mortgage through a traditional bank, they’ll expect to see your W-2. They’ll want to know what your taxable income looks like and see evidence that you’re earning regular paychecks. 

For self-employed individuals, this type of documentation isn’t necessarily available. And when you’re taking write-offs for tools, travel costs, home office supplies, and other necessities, your taxable income will be much lower. Your business might be booming, but that might not be reflected in your income.

A traditional bank might think your earnings are a lot lower than they actually are. Consequently, it could be hard to secure a mortgage that meets your needs. 

Running into Lending Obstacles

When you try to work with traditional lenders, they may expect to see at least two years of self-employment documentation. Further, you’ll need to show tax returns for both your business and personal situation. 

Traditional lenders want to see evidence that your income is stable, if not increasing, too. But if your business is new, you won’t have this track record of success. Or, if you’ve shifted into a new industry, you won’t have a deep history to show. 

In general, banks can be wary of moving forward with loans for homesteads. These properties can be difficult to value, and they may not have a lot of amenities. Banks prefer to work with more traditional properties that are clearly zoned and less risky.

Considering Alternative Lending Programs

While it may feel like you’re running into a brick wall with traditional lenders, better alternatives can work. Some lending programs focus on bank statements as a way to understand income and help buyers secure the loans they need.

Bank statement lending involves looking at one or two years' worth of bank statements. Lenders can look at your deposits into business or personal accounts and gain a clearer picture of income. If you’re taking write-offs, these won’t be reflected in your bank statements. 

If you’re a contractor, rental host, shop owner, or farmer, bank statement lending may be the right match. A reputable lender like Griffin Funding can help you get started with the process or answer any questions you have about loans. 

How Non-Traditional Loans Work

When you turn to bank statement loans or other alternative mortgage options, be prepared for some different terms. Especially if you’ve worked with traditional funding sources in the past, you may not be aware of some of the requirements or expectations.

You may need to make a higher down payment when you seek a non-traditional loan, for example. And your interest rates could be slightly higher, as well. 

Additionally, be ready to provide more documentation demonstrating your financial readiness. Lenders want to feel confident that you’ll be able to make monthly payments, even if you don’t have a traditional income stream. 

Yes, it might feel like you’re jumping through extra hoops. But it’s worth the effort when you know you can secure a loan to finance a homestead. Bank statement loans aren’t inherently risky, either, so you’ll be making a responsible choice. 

Preparing to Apply

As with any financing scenario, you’ll need to be mindful of your spending habits to help paint a strong picture of fiscal responsibility. This is especially true if you’re self-employed. 

Don’t make any big deposits into your accounts prior to applying. These can be red flags that make lenders wonder if you’re actually earning a steady income from your business. 

Make it easier for lenders to understand your financial picture by creating different personal and business accounts. You don’t want money from your business to intertwine with personal expenses.

Start saving, too. Knowing that you could need to make a bigger down payment, it’s best to set aside money regularly. A lender may be more likely to approve your application, too, if you’re able to make a higher down payment. 

Get Ready to Finance a Homestead

When you’re self-employed, you have a lot of freedom, and a homestead might be the perfect place to land. But securing a loan to finance this purchase can come with some extra burdens. Thanks to alternative lending options, however, you can demonstrate financial readiness and be on your way to making a purchase.

Start saving for a down payment, and keep your business and personal accounts separate. With a little planning, you can show your financial strength and earn approval for your application.