A house is a huge financial responsibility, and this fact cannot be truer for entrepreneurs. You must know what you’re getting into before signing up for a home loan, especially if you are running a business that neither stable nor high-yielding. So, the big question is: when should entrepreneurs buy homes? And when should entrepreneurs NOT buy homes?
First, let’s talk about the signs that indicate you’re ready for homeownership.
Low debt-to-income ratio
One of the most important factors in mortgage qualification is the debt-to-income ratio. This refers to the percentage of your income that goes into paying debts. If you’re trying to qualify for a mortgage, your debt-to-income ratio needs to be lower than 43%.
If you have already made a significant dent in your business loans and other debts, you may be one step closer to your dream of buying a house.
Good credit score
Another thing that mortgage lenders look for is a good credit score. With a higher credit score, you will have better chances of qualifying for a higher borrowing amount with lower interest rates. Inversely, having a low credit score might have you paying higher interest rates, fees, and even penalties.
Many entrepreneurs tend to have lower credit scores because they are the likeliest of people to borrow money. But if you have built your FICO score at 740 or above, you are more likely to get a mortgage with the best interest rates. You may qualify for a mortgage with a lower credit score, but the high-interest rates will take money away from your personal budget and business investments.
Less risky businesses
Entrepreneurs are seen as risky borrowers because there are so many ways that businesses can fail. That said, mortgage lenders want borrowers to have less than 25% ownership in their business ventures to be considered less risky. This can be done by bringing in more investors or partners to your business through incorporation.
High cash reserves
The down payment on a house alone will take a hefty chunk of cash from your bank account. There are also closing costs, property taxes, moving expenses, and other fees to consider. If there will be plenty of cash in your reserves after you buy a house, it’s a good sign that you’re ready to do so.
When you should not buy a house
If you state the opposite of all the things mentioned above, you’ll have the first few signs that you should NOT buy a house–at least not for now. But apart from that, here are other signs that you are not ready to buy a home just yet.
High chance of relocation
When you get a mortgage, you’ll be paying that for at least 15 years. Essentially, you’re stuck unless you want to lose money by reselling the house. Entrepreneurship often involves moving from place to place. You won’t be able to chase a business venture or get a new job halfway across the country if a mortgage ties you down. Hence, your opportunities are limited. You may have to settle for less, and there is no quicker way to kill entrepreneurial spirit.
If you can’t picture yourself staying in one place for more than five years, it may not be a good idea to buy a home just yet. Mobility is one of the keys to becoming a successful entrepreneur, especially for those just starting.
Maintaining a house requires a huge time commitment. And if you’re busy running a business and brainstorming your next venture, a house can add a huge responsibility on top of your already heavy burden. Can’t make the time commitment to maintain a house? Don’t buy one.
Entrepreneurs need liquid cash. A house is a liability that is incredibly difficult to liquidate. You do the math. A business is a huge financial responsibility in and of itself. Granted, your personal and business finances will be separate–but what if you need to delve into your personal bank account to save your business?
Unless you have millions of dollars in cash reserves, it may not be the right time to buy a home. Moreover, if you like having cash (and lots of it) just laying around in case of the worst possible scenarios, save up more money until making a down payment on a house will not make a significant dent in your finances.
There are a right and a wrong time to buy a house, especially for entrepreneurs who don’t work regular 9 to 5s. If you are unsure if buying a house is the right move now, consult with a financial advisor first and foremost.