The housing market continues to be strong in California and many are looking at how to purchase a new home for multiple reasons—from needing more space to downsizing. With tight inventories, home buyers need to be ready with mortgage preapprovals to compete for homes. For business owners, a frequent concern centers on how self-employment and their assets will be viewed by lenders when securing a home mortgage.
At California Bank & Trust (CB&T), the mortgage loan team understands that business owners are intrinsically tied to their businesses, and assets are not always reflected neatly into personal income through traditional W-2s. They also know that time is precious for time-crunched business owners. In response, CB&T has streamlined the loan-qualification process extensively.
JR Younathan, SVP and area retail mortgage manager at CB&T explains: “Because each business owner situation is different—from owning multiple businesses to using different approaches to manage cash assets—applying for a mortgage for a business owner needs to be flexible. To help support these diverse business-owner situations, we provide three easy-to-follow ways to apply for a mortgage and a distinctive way of viewing down-payment options. For example, if you own property for your business, this property may be heavily depreciated, so we take that into account. Our approach is unique to CB&T and we’re so pleased to be able to make this process easier for our valuable business-owner clients.”
#1 Cash flow analysis
Good option for: high net-worth owners who can show cash distributionsThis program allows for a pure cash-flow analysis. CB&T looks at the amount that is disbursed directly to you from the business minus any of your personal investments that you put back into the business. This enables you to reduce documentation significantly because personal tax returns and K-1s are all that are required for an initial review.
CB&T calls this the Platinum Program and there are requirements for reserves and overall income/net worth with this method.
#2 Ordinary Business Income (OBI) method
Good option for: owners of multiple companies
This is in line with the more typical Fannie Mae traditional income-analysis method, and the CB&T form even has elements of the Fannie Mae form 1084. “However, if a client owns multiple businesses and they have shown positive income via Schedule E Page 2 two years in a row, we don’t need that income to qualify. We can void the gathering of those specific business tax returns to help reduce the document load on our clients,” Younathan said.
This approach is particularly beneficial to owners of multiple businesses in order to potentially reduce the significant amount of paperwork associated with several tax returns that would otherwise need to be collected and reviewed for underwriting.
#3 Asset dissipation calculation
Good option for: owners with a high net-worth personal investment portfolio
This is an opportunity for CB&T to utilize a business owner’s assets as part of the picture of hypothetical cash access that can be translated to income in order to qualify for a mortgage. “For example, if you have $5 million in liquid assets, we can add it to the equation,” Younathan said. “Or maybe you are of retirement age, traditionally 59 ½, and have retirement income that we can consider.”
Down payments: alternate ways to leverage your assets
“We recognize that business owners have cash in their businesses, which they can still potentially distribute to themselves,” he said. “So we enable business owners to use these business assets for down-payment purposes.” They do require the clients to own more than 50% of the business to consider these assets and must have access to these funds for personal use.
A credit line
Prudent business owners leverage credit lines for multiple facets of their business needs—from equipment to operational expenses. “Because you have a personal stake in your business, you can use your personal or home equity line of credit for a down payment,” he said.
Making it easier to secure a mortgage efficiently
As one of the leading banks supporting California businesses, CB&T strives for close relationships with business clients, says Younathan. Making the mortgage process simpler is part of this effort: “This reduction in documentation requirements and flexibility in viewing your financial picture to qualify for a loan is designed to make it easier to qualify for a loan and compete effectively for a new home in this competitive housing market.”