When you own a small business, the phrase “home sweet home” can also mean “business sweet business” as everything overlaps. If you have a home-based business or have money tied up in developing your startup, it can be challenging to get a mortgage.
For small business owners, a Federal Housing Administration (FHA) loan is an alternative option to conventional mortgage plans. Those who don’t qualify for a mortgage may qualify for an fha loan. Here’s what you need to know about this option to determine if it’s the path for you as a small business owner.
What is an FHA Loan?
An FHA loan is a federally-backed mortgage that can help you purchase your first home if you have a small down payment, limited income, or credit challenges. In essence, it lowers the barriers related to down payment percentages and financing costs to make home ownership more accessible. This is a viable option for small business owners, as income often fluctuates and credit can be impacted by the business.
Are You Eligible?
To be eligible for an FHA loan as a small business owner, you must fit one of the following business structures: sole proprietorship, partnerships, limited liability corporation (LLC), corporation, or “S” corporation. You are only eligible if you own 25% or more of the business. As a sole proprietor, this percentage isn’t a concern as everything is filed under your personal income tax and you are the only owner.
To apply as a business owner, you must also have two years of documented, proven experience and stability as a business owner. If you have less than two years, you are considered a higher risk applicant and will need to prove your experience in other ways. For example, if you have been in business for one year, you must present proof that you’ve had at least two years of employment in the same industry or at least a year of formal education in your field.
If you are not able to meet the qualifications or have less than one year of experience as a small business owner, you will not be eligible for an FHA loan.
When applying for an FHA loan, you will need to provide at least two years worth of tax returns and associated documentation. If you have a corporation, “S” corporation, or partnership, you will also be required to submit a business credit report. An updated profit-loss statement may also be requested with your application.
An FHA loan will help you become a homeowner even with the challenges of operating a small business. This will enable you to start building equity, creating a nest egg should anything go awry with your business or personal life. If you have a home office, a portion of your bills are eligible to be claimed as a tax credit. By spending less on the down payment of your home, you are able to redirect finances into growing your business rather than becoming cash-strapped.
If you require a substantial loan, then an FHA loan is probably not for you. You also need to work with an expert so that you don’t end up in a worse situation than you started out with. As with any major financial decision, it is always best practice to consult with a trusted financial advisor who has experience in FHA loans and your financial situation. They may be able to determine if there is a better option or if an FHA loan is the answer to your problems.
Homeownership, like business ownership, can be both challenging and extremely rewarding. Having one shouldn’t mean having to sacrifice the other. Talk to the experts and find a solution that fits your needs.