Mortgage Refinancing Tips For Self-Employed Borrowers

Self-Employed and looking to refinance your mortgage?

Refinance loans for self-employed borrowers have become much more difficult to qualify for in the past year, but great low refinance mortgage rates are still available to qualified self-employed borrowers.

The only issue that differentiates self-employed borrowers from salaried borrowers is their source of income. If as a self-employed borrower you can document sufficient income to qualify for your loan, then your loan request will be treated like that of any salaried borrower. Mortgage interest rates are the same for self-employed borrowers as they are for salaried borrowers.

Determine your employment status

The first issue to clarify is to determine whether or not you are actually self-employed. According to standard mortgage underwriting guidelines, a borrower is self-employed if he or she derives income from a business where he or she owns at least 25% of the business.

Many borrowers assume that since they own a small percentage of a business that they will be considered self-employed, but as long as a CPA can verify that the borrower's ownership is less than 25% of the company, a borrower can be treated as a salaried employee if they are receiving W2 income from that company. If a borrower receives partnership income such as K1 income, then they can still be considered not to be self-employed if they are below that 25% threshold.

Some borrowers do not think they are self-employed when in reality they are. The most common example of this situation occurs when a borrower is receiving 1099 income from one source, often an employer where the borrower used to be employed as a W2 employee. In these situations, the borrower's status is self-employed.

Why is your employement status important?

Whether a borrower is self-employed or not is an important determination for three reasons. First, underwriters require self-employed borrowers to be self-employed for at least two full years. While it is technically possible for a borrower who became self-employed in the middle of one year to get approved for a mortgage in the middle of the year two years later, the reality is that it would be really difficult to provide income from one full year and two half years. Ideally, underwriters would like to see two full years of tax returns that they can review. Without the two years of documented self-employment history, self-employed borrowers will not be able to get approved for a loan.

The second reason why a self-employed determination is important is because self-employed borrowers have their income averaged over a two year period. If income from the current year is higher than the previous year, then both years will be averaged. However, if the income from the current year is lower than the previous year, whether or not the income will be averaged depends on the underwriter. Many underwriters will use the lower current year income and ignore the previous year income to take the extremely conservative approach.

Finally, being self-employed usually means that you take as many business deductions as possible to minimize your taxable personal income. While that is great for saving on taxes, it is bad for qualifying for the maximum loan amount possible. The good news here is that in many cases underwriters can add back deductions to your income to increase how much you can qualify for. For example, many self-employed borrowers take a large depreciation expense which is actually a non-cash deduction. Underwriters can add that back to your income if you have a sole proprietorship (Filing Schedule C) or an LLC (Filing a K1/Schedule E). Similarly, if you can show that you pay some of the debts showing up on your personal credit report out of your business (such as a car loan), you can exclude that personal debt from your debt-to-income calculations and qualify for a larger loan amount.

Self-employed borrowers who need to refinance should definitely submit their financial documents to their lender at the time they apply and ask for a free pre-approval before officially starting their application and paying any application fees. This will maximize the likelihood of approval.

For an exact refinance rate quote and a free analysis of how your self-employment income will be reviewed by underwriters, complete a free rate quote request now!.

To see the current mortgage rates, visit our Current Mortgage Rates page.

If you have any questions that you would like to get answered by our expert mortgage brokers, please email us or call us at 1-877-868-2503.

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