One of the main reasons self-employed borrowers have difficulty obtaining a commercial loan is because of their reported income on annual tax returns. This is one of the many perks of being self-employed—all those write-offs including lunch with clients and travel expenses associated with training and business prospects. Unfortunately, all those write-offs are also the reason that individuals find it difficult to get the commercial loans they need to get started or increase their real estate investment portfolio.
One of the requirements that commercial lending institutions utilize is the debt-to-income (DTI) ratio. This is the ratio of monthly payments or liabilities such as car, credit cards, insurance, mortgage, etc. to monthly income. The requirements generally range anywhere from 38 to 50 percent. Lenders further break it up into two categories: front and back-end. Your front-end relates to housing payments while the back-end is your total recurring debt payments. These numbers will be determined by your bills and your tax returns, making it difficult for those that have lessened their tax burden through numerous business deductions. In addition to your past two years of tax returns, you will require other documentation.
Most traditional commercial lenders will require the following from a self-employed business owner: A copy of your business license, most recent 2 months of bank and asset statements, year-to-date profit and loss statement, and current property’s insurance. If you are a corporation, you will also need the last two paystubs with year-to-date earnings. If you are not “paperwork” minded and diligent in keeping business records, providing the needed documentation that gets you approved can be nothing short of a nightmare. Fortunately, there are alternatives.
If you are looking to develop or expand your real estate portfolio, a hard money lender may be the funding you are looking for. Most private lenders in this category look to collateral as a means of securing the loan and pay less attention to credit scores and DTI. One option is obtaining a bridge loan—a short-term loan that investors use in order to purchase a property quickly and make the necessary renovations before reselling.
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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