Why your side business makes getting a mortgage tougher

January 6, 2021/Scott Sheldon

The reality of today’s mortgage market may come in the form of tough love. For many families purchasing or refinancing a home can make a huge financial impact on their life. Applying for and successfully get a home loan can be a bit tricky depending on your financial situation. Here are some things to just kind of keep in mind when it comes to the lay of the land in procuring home financing…

You must be able to support ability-to-repay ATR. This is a government-mandated requirement that specifically requires the lender to document your actual ability to repay the money you’re desiring to borrow. This means you must have a credit score that’s sufficient, you must have a debt-to-income ratio that is sufficient, the property must be sufficient, the equity in the house must be sufficient, and your income, you guessed it all must be sufficient. One of the biggest reasons why people don’t get loans in today’s environment is due debt-to-income ratio -too much monthly consumer debt in relation to the income being used in conjunction with the mortgage payment. There must be enough income to support the total amount of monthly debt load.

It’s a 2:1 ratio to one as max payment income allowance. So for example, if you have $2,000 a month of monthly debt including the new housing payment plus car loans and student loans, example, you must have $4,000 a month of documentable income on paper to offset the $2,000 a month expense.

Well, it becomes a little bit more unique if you have other streams of income that show losses so for example if you have a business on the side that’s losing money, that will go against your income making your debt-to-income ratio higher because those expenses still must be offset by something. If the revenue from the side business negates all the income from your traditional income stream, there will be a debt to income problem.

  • pay off consumer debt
  • add a cosigner
  • change loan programs
  • borrow less money
  • lower the interest rate

**Mortgage Tip** the debt to income ratio for most loan programs is 50%, some with even go as higher at 56%.

An experienced mortgage lender that what underwriters going to ask for ahead of time is your best bet if your situation is anything out of the ordinary.

Looking to get a mortgage to buy a home? Get a no-cost quote now!

 

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RELATED MORTGAGE ADVICE FROM SCOTT SHELDON

When buying a home, it’s natural to want the lowest mortgage rate possible. But sometimes, chasing a slightly better rate from another lender—especially after your offer has already been accepted—can backfire in a big way. Let’s walk through a real-world scenario. You’ve got an offer accepted on a house. You’re working with a lender who has you approved, documents in underwriting, and a 21-day close of escrow in place. Everything is moving forward. Then you hear from another lender offering a rate that’s 0.25% lower, with slightly better closing costs. It’s tempting. But before you make a jump, here’s what you need to consider. Switching Lenders Comes with Time Costs When you pivot to a new lender mid-contract, they’ll need to: Re-underwrite your entire loan, Order a new appraisal, Disclose and sign new loan documents, Submit the file for final loan approval, Schedule and fund closing—all over again. This doesn’t happen overnight. Even in ideal circumstances, the new lender is likely going to need at least 25–30 days to close. If you’re in a fast-moving or competitive market, this is a real problem. Most sellers won’t grant a contract extension just because you’re switching lenders. So, what happens next? A Contract Extension Can Jeopardize Your Deal Asking for a contract extension means the seller must agree to delay closing. But that delay introduces risk—especially if the seller has backup offers or simply wants certainty. They may not grant the extension. Or worse, they could cancel the deal outright and take another buyer’s offer. Even if the seller agrees to extend, your earnest money and negotiation power could take a hit. And for what? A slightly lower rate that might save you $50 to $75 a month? Mortgage Rates Aren’t as Far Apart as You Think Here’s the truth: all mortgage lenders get their money from the same place—the bond market. The pricing differences between lenders usually range from 0.125% to 0.25% in rate on any given day. If one lender seems to be offering dramatically better pricing, the first thing you should ask is: How? Head over to FreddieMac.com and check the average 30-year fixed rate posted weekly. This is one of the most reliable benchmarks for where rates truly stand in the market. If a lender is quoting you a rate that’s well below that average, ask for the details: Are they charging extra points? Is this a teaser rate with a prepayment penalty? Is it based on a different loan product or risky structure? Often, what sounds “too good to be true”… is. Consider the Bigger Picture Think long-term. If you’re financing $600,000, a 0.25% lower rate may reduce your payment by roughly $75/month. But what if you lose the house and have to start over? That monthly savings doesn’t mean much if you’re outbid on your dream home or lose your deposit. Also, remember: you’re not going to keep this rate forever. Today’s homebuyers typically refinance when rates drop by about 0.75% or more. So if rates fall within the next year or two, you’ll likely be refinancing anyway. Instead of paying extra points now or risking the entire deal for a minor monthly savings, it may be better to accept a slightly higher rate—knowing you’ll refinance when the time is right. The Real Risk Isn’t the Rate—It’s the Delay When shopping for a home loan, don’t just ask, “What’s your rate?” Ask: Can you close on time? Is this rate sustainable or based on hidden costs? Will switching lenders delay or jeopardize my contract? A home purchase contract is a binding agreement between you and the seller to perform within a set timeframe. If you can’t meet those dates because you're chasing a slightly better rate elsewhere, you may want to reconsider if now is the right time to buy. Final Thoughts Yes, interest rates matter. But execution matters more. Before making a switch mid-transaction, talk to your lender. Have an honest conversation about pricing, timelines, and strategy. You might find that staying the course, securing the house, and planning to refinance later offers a better path to financial security. Want to Know Your Options? Let’s compare rates and strategies the smart way—without risking your dream home. 👉 Click here to get a custom rate quote today.

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