Unlocking the door to homeownership: tips for small business owners

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While the housing market is finally starting to cool, soaring mortgage rates still have many people feeling like owning a home is out of reach. Small business owners may feel especially behind, as their flexible income and tax situation can make it even more challenging to secure a mortgage.

Minnesota’s average 30-year fixed mortgage rate is 6.39% — six points higher than the national average. Higher rates can be daunting for potential homebuyers with fluctuating income — but with a bit of planning and perseverance, it is still possible for small business owners to buy a home. 

This guide provides tips and insight on how small business owners can ensure their business remains healthy while smartly navigating the housing market, starting with variable expenses.

What are variable expenses, and how can managing them help small business owners budget for a home?

Variable expenses are costs that fluctuate depending on the needs of a business and can include everything from utilities to marketing expenses.

Variable expenses are divided into two categories:

Operating costs: Operating costs include utilities, inventory, supplies, marketing and advertising expenses, and maintenance and repairs.

Costs of Goods Sold (COGS): COGS include raw materials, direct labor, production supplies, and shipping costs directly related to the production and sale of goods.

By keeping track of variable expenses and finding ways to cut unnecessary costs, small business owners can free up funds for a home down payment while determining which expenses are deductible for tax purposes, potentially reducing their overall tax liability.

Small business owners should remember that write-offs and deductions can unintentionally harm their ability to qualify for a mortgage, so they should make those expense determinations carefully

Determining business write-offs 

When it comes to write-offs and deductions, small business owners should weigh the benefits of reducing their taxable income against the potentially negative impact on their mortgage application. Lenders often look at a person’s reported income when determining their eligibility for a home mortgage. Too many expenses may unintentionally lower reported income, making qualifying more challenging.

That said, small business owners should avoid writing off expenses completely! Finding the right balance between reducing taxable income and ensuring mortgage eligibility requirements are being met looks different for everyone.

Achieving homeownership

As a small business owner, it’s important to remember that financial stability and long-term planning are vital to achieving your goals.

Here are some actionable tips and tricks to help you manage your business expenses and reported income to advance on the path to homeownership. 

Create healthy boundaries between personal and business finances

Keeping a clear separation between personal and business finances is crucial for small business owners —not only because it can make managing finances easier, but also because having all of your financial documents, both personal and business-related, organized and ready to go can streamline the process of applying for a mortgage and potentially improve your chances of getting approved.

“Small business owners must view their unique situation as having two separate entities: As an individual, they are one entity, but as an owner, their small business is the other,” said Stephen Spears, senior vice president of Twin Cities community banking at Bremer Bank. “The individual entity is what invests into the business entity. It’s important to think of the situation as though the small business owner is investing their individual time, money and effort into their business.”

Spears noted the benefits of doing so. “It makes it easier to ask yourself: What are you getting in return? Approaching the arrangement this way helps in thinking like an investor in your business rather than blurring the lines, which helps maintain healthy boundaries.”

If this sounds confusing, Spears recommends reframing how you view your business and finances.

“If you’re an individual investing in and owning your small business, consider yourself the bank — you’re lending both your time and your money,” said Spears. “Determine whether your lending of these two valuable resources is a good investment or not.”

Invest in yourself and your business 

Investing in yourself may sound like a cliche, but it’s a tried and true method. By focusing on personal growth, education, and building your skills, you can increase your earning potential, gain new opportunities, and achieve your financial goals.

Investing in yourself looks different for everyone but could include everything from enrolling in a course or certification program to gaining new skills, attending industry conferences and events, and networking with other professionals in your field. 

Minimize variable expenses

Minimizing variable expenses, like office supplies and equipment, is crucial in managing reported income and qualifying for a mortgage loan, as they can quickly add up. While it may be tempting to overspend on business expenses in the short term to grow your business, doing so can have negative consequences in the long run.

One way to minimize variable expenses is by negotiating with vendors and suppliers to secure better materials, supplies, and service prices. For example, you could consider consolidating purchases from a single vendor to negotiate a volume discount or negotiate longer payment terms to improve cash flow.

Another way to reduce variable expenses is by implementing cost-saving measures in your operations, switching to energy-efficient equipment to reduce utility costs, implementing a paperless system to reduce printing and mailing costs, or using social media for marketing and advertising instead of traditional methods. By prioritizing necessary expenses, you can free up funds for a down payment on a home and position yourself for long-term financial stability.

Improve your credit score 

In addition to keeping financial documents organized, it’s essential to maintain a good credit score. People with higher credit scores typically receive more favorable terms and interest rates and a wider range of financing options, which can make homeownership more affordable and achievable.

If you have poor credit, don’t fret. You can improve it by paying off high-interest debt first and making timely payments. Keeping your credit utilization low and not applying for too many new credit lines can also improve your score.

“Fortunately, poor credit is something you can proactively work with a credit counselor on,” said Spears. “Each person’s finances are unique and specific to them. Credit counselors can help you better understand your current situation and provide tools to help build your score back up. There are a lot of resources out there!” 

Work with a financial advisor

If you’re feeling overwhelmed or like you need additional support in successfully managing your finances, partner with a financial advisor. They can help you create a personalized plan and offer guidance on paying off debt, saving for a down payment, investing in retirement and more.

“The very first step someone should take in their homebuying journey, regardless of whether or not they’re a small business owner, is to visit a trusted financial organization that can lend you the money needed for a home,” said Spears. “Work with them to get a mortgage pre-qualification before you go out home shopping. That way, when you fall in love with a house, you can move quickly and know the place is within your budget.”

The bottom line

Buying a home can be daunting, especially for small business owners who face unique challenges when securing a mortgage. But with a bit of planning and perseverance, small business owners truly can make homeownership a reality.

The most important part of the homebuying process is seeking information to fully understand your financial situation and options — and the Bremer team can help! Our mortgage loan officers are well-equipped to help guide you down the path that makes the most sense for your needs and refer you to other real estate and financial experts, as needed. Learn more at www.bremer.com.