Homeowners refinance their home loans for numerous reasons with many seeking an improved rate and a lower mortgage payment. But whatever your reasons are, being self-employed is going to make the process more challenging. This comes as mortgage lenders find this group carrying greater risks thanks to their inconsistent income.
If you’re self-employed or a contract worker seeking refinancing, keep the magic number of two in mind. This refers to lenders seeing employment contracts and a two-year track record of self-employment income that will be large enough to repay the desired loan. This can be tough for some as many will write off numerous expenses and lenders will review net income not gross income for these self-employed applicants.
For some, having two years of tax returns showing income can be tough. But there’s more.
“You will have to provide significantly more documentation, and there will be a lot more questions about your documentation,” said Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a San Francisco Bay Area mortgage professional.
Exceptions to this two-year rule can be made by lenders if your self-employment is in the same field as your earlier job and the following factors have remained robust: your credit background, debt-to-income ratio, your credit profile, and your home equity and assets.
Don’t despair if you can’t meet these factors. With a little work, the following tips will help you get on the path to refinancing.
Create profit and loss statements
Along with showing income tax returns, you’ll have to present lenders with a profit and loss statement from borrowers to paint a picture of your business. The longer you’ve been self-employed, the better your track record via a financial statement, which will illustrate the path of your income from this business.
Maintain a solid savings account
With a fluctuating income, you’ll need a solid saving account for emergencies. You should have one regardless, but this will also show to lenders that during temporary income dips you’ll still be able to make mortgage payments.
Decrease your debt
While you’ll need to build your savings, you’ll also need to keep your debts in check and maintain a low debt-to-income ratio. The lower the ratio is, the more it will improve your chance of approval by lenders. However, lenders will occasionally loan to borrowers with a 43% maximum ratio.
Keep a high credit score
Keeping your debt down will help you retain a high credit score. Between 740 and 750 and higher is required to obtain the lowest interest rates, while a higher number will also show your ability to manage credit.
Prior to seeking a loan approval, review your credit score and determine what steps you’ll need to take to improve it. Paying down a few debts will be one way to do so.
Shop for a lender and a loan
Not all lenders are created equal, as they’ll have unique credit standards and loan programs. You may qualify with one but not the next, so it may be worth your time to shop around. Determining whether the desired loan will be a longer or shorter one as well as who will issue it, such as a government-insured or a more conventional loan, are also factors that will lead you to look around at different lenders.
Be sure to ask them as many questions as possible to determine if this is a good fit.
Be prepared as refinancing is a process and one that will be more difficult if you’re self-employed. By keeping your financial house in order and showing the requisite documentation, you’ll be able to obtain this in no time.