America is a country that applauds its entrepreneurs, although you won't hear much cheering coming from mortgage bankers. That's because the self-employed-who often have complicated tax forms and show less income than their corporate counterparts-may have trouble qualifying for a conventional loan or mortgage refinance. But even a crabby banker would have to agree that there are significant reasons why the self-employed should consider becoming homeowners or tap into their home equity.
Fixed rates, shorter terms
Many people who are self-employed choose a fixed-rate mortgage instead of an adjustable-rate loan. It allows for easier planning, and there's no scrambling if your mortgage rate adjusts higher. You can also choose a shorter term, which allows you to pay off the mortgage earlier. This can result in more cash to invest in your business.
The documentation trap
It's often difficult for the self-employed to qualify for a mortgage loan due to complicated document needs and tax returns. In the past, a non-salaried worker could opt for a "lo-doc" or "no-doc" loan. But recently, the IRS has tightened guidelines for these types of mortgages, so they're harder to get. Contact your lender and find out what documents they'll need before applying for a home loan. These usually include two years of tax returns, a current profit and loss statement, and bank and investment account statements. If you're refinancing, they'll also need your pay-off balance, and information about your current mortgagor.
Deductible delight
One of the main gripes of the self-employed is that they must pay twice as much Social Security and Medicare taxes as an employee of a company. That's why the tax deductions that mortgages provide should be highly valued. The interest portion of your mortgage payment is tax-deductible, as are your property taxes. These two write-offs can help ease any heavy tax burden.
Embarking on a mortgage refinance is never an easy task, and it's particularly onerous for the self-employed. But as is usually the case for the ambitious entrepreneur, many of these obstacles are worth hurdling.
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