Are you self-employed and having a tough time getting approved at Your bank?

Prime lenders have made it difficult for self-employed (sole proprietor and corporation) earners to obtain financing through regular banking channels. These individuals are now forced to decide between either paying less taxes, or paying less interest.

Sub-prime lenders calculate self-employed income differently than prime lenders and look at the persons total financial picture. The additional income discovered will often be enough to help the self-employed individual qualify for a larger loans, while keeping payments marginally more expensive.

For example:

A 500k conventional mortgage at 2.59% will have a monthly payment of $2,262

A 500k sub-prime mortgage at 3.69% will have a monthly payment of $2,546

The monthly difference is $284; and the annual difference is $3,408.

An additional $3408 in interest a year is not a cheap premium by any means! But what if our self-employed individual can’t qualify for a loan of this size because they don’t pay themselves enough income from their company?

The only way to qualify for a larger amount through a prime lending channel is to show more income – which means paying more taxes.

Depending on which tax bracket they’re in, showing an additional 10-15k in income would translate to roughly a $3,408 tax bill.

Strategy

If a self-employed individual is not able to qualify for mortgage through a prime lender, a sub-prime option may be a great alternative. Sometimes only a 1-year or 2-year term is all that’s required to set an individual up with a prime lender in the future.