Mortgage Solutions for Founders
Jason Beacham
Director, Product Management
As an entrepreneur or founder, your financial journey is anything but typical. You embrace risk, and your nontraditional earnings lifecycle means cash flows and income streams vary significantly.
Financing a home under these conditions requires a mortgage advisor who understands the nuances of venture financing, private equity and post-IPO planning—someone who can streamline the home loan process for you.
A holistic financial review
To make informed home financing decisions, start with a comprehensive review of your balance sheet and cash flow projections with a trusted mortgage advisor. This review helps optimize interest rates, maximize purchasing power, strategize on expenses and highlight upcoming liquidity events. The objective is to align a mortgage with both your immediate needs and long-term goals.
During this review, you'll assess how variable income sources like stock options, bonuses, consulting fees and fund distributions affect your qualifying income. When your income is strong relative to your debt, post-close liquidity requirements become less of a concern. Conversely, tighter cash flows necessitate higher reserves to mitigate the risk of income loss.
Advantages of a holistic review
Prequalifications are powerful negotiating tools that can significantly enhance your homebuying process. By engaging with your mortgage advisor, you gain a comprehensive understanding of how your cash flow and balance sheet planning can be affected in different scenarios. This thorough review helps uncover your borrowing capacity and ensures you're well-prepared when making an offer on a property.
A well-planned strategy can boost your offer strength and demonstrate to sellers your ability to secure financing. Furthermore, it allows you to focus on finding the right property without worrying about the financial aspects, streamlining the entire homebuying experience.
Finding the right mortgage
Traditional 30-year fixed-rate mortgages are often the default option from retail lenders due to their conservative nature. However, if you're a founder, you might benefit from more flexible options. Paying a rate premium for long-term fixed rates may not be ideal if you expect future liquidity events or plan to sell the property within 10 years. Instead, consider adjustable rate mortgages, or ARMs—like 5/6, 7/6 or 10/6—which offer lower initial rates and monthly payments. Be sure to review the following key points.
- Initial rates and payments: ARMs typically start with lower rates and payments. Review your financial projections and future liquidity needs with your mortgage advisor to determine which term is best for your situation.
- Rate adjustments: Rates adjust every 6 months after the initial fixed period, with adjustment caps to protect you from sharp increases. For example, after 7 years on a 7/6 ARM, you can expect rates to adjust 1% per adjustment period.
- Payment structures: Options include interest only for the initial years or fully amortized for the full term. Interest-only structures offer lower initial monthly payments and greater flexibility with cash flow planning. On the other hand, fully amortized structures can help maximize your purchasing power through lower down payments and qualifying criteria.
Refinancing and HELOCs
Once you own the property, refinancing and home equity lines of credit, or HELOCs, can be valuable tools for managing your financial strategy.
Refinancing
Refinancing involves replacing your current mortgage with a new one—often to secure a lower interest rate, adjust the loan term or access equity in the property. This can lead to significant savings over the life of the loan and provide additional funds for home improvements, debt consolidation or other investments.
When considering refinancing, it's important to compare your current interest rate with the prevailing rates and calculate potential savings. Additionally, assess any fees associated with refinancing to ensure the benefits outweigh the costs.
HELOCs
A HELOC functions as a revolving line of credit secured by your home equity. It allows you to borrow funds as needed—up to a predetermined limit—and you only pay interest on the amount borrowed. This flexibility makes HELOCs ideal for managing cash flow, funding major expenses or investing in opportunities as they arise.
When combined with a mortgage refinance, a HELOC can save on closing costs and provide a versatile financial tool for long-term planning. Understanding the tax implications and potential interest deductions is also crucial, so consult with your CPA to maximize the benefits.
Other considerations for founders
Tax implications are a key consideration when obtaining a new loan. It's important to review interest tax deductions available to you with a tax professional—whether you're buying a new home or refinancing an existing mortgage.
Asset protection through estate planning is another important discussion for any real estate financing exercise. One common strategy is vesting title to your home in the name of your family trust. If you don't have a trust established in time for the closing, you can still transfer the title into the name of your trust post-acquisition. Work with a trusted estate planning attorney to explore these strategies.
While you consider your options, be sure to discuss other life events that can impact your mortgage or refinancing decisions. These can include starting a family, having a spouse re-enter the workforce or working for a startup with fluctuating cash flow.
The bottom line
Your unique needs as a founder require a unique approach that many traditional retail lenders may struggle to fulfill. For example, if your ownership interest is greater than 25%, traditional lenders may hesitate to move forward with your home financing. At First Citizens Wealth, we can help you navigate your unique challenges and secure a dream home that aligns with your business and personal financial plans.
