June 1, 2017
When applying for a refinance self-employed borrowers are
evaluated a bit differently compared to someone that receives a pay check from
an employer on the 1st and 15th of every month. When
lenders decide whether or not a borrower can afford to make the monthly
payments they compare total monthly credit obligations, including the new
mortgage payment with gross monthly income. Pay check stubs easily show how
much someone makes each month as well as provide a year-to-date total. For
self-employed borrowers, lenders review the two most recent federal income tax
returns, both personal and business. This is the routine whether for a purchase
or a refinance. When preparing for a refinance, here are some tips for the
You’ll need your two most recent federal income tax returns
so go ahead and locate those and keep them handy. Your lender will ask for them
so it’s best to submit them along with your initial loan application. The
lender looks for consistent, year-to-year net income and will average those two
years in order to reach a qualifying amount. You can start preparing a
year-to-date profit and loss statement as well. Most loans only need a P&L
composed by you and doesn’t have to be prepared by your accountant.
Conventional loans will need at least 10% in equity for a
refinance. This amount is arrived at by ordering a new appraisal. This means
the loan amount cannot be greater than 90% of the current market value. You’ll
need to provide copies of your most recent bank statements in case you need to
take care of certain closing costs. Speaking of closing costs, given sufficient
equity you can roll some or all of your closing costs into your new loan. You
can also ask your loan officer to prepare a quote for a “no closing cost” loan
which will increase your rate but keep your loan amount closer to the
outstanding principal balance. Minimum credit scores for a conventional
refinance can range between 600 and 620.
However, if you currently have a government-backed loan such
as a VA, FHA or USDA program, there is very little documentation needed which
means less preparation. All three programs carry a “streamline” option which
doesn’t document income, employment or even require an appraisal. As long as
you’re lowering your rate or switching from and adjustable rate into a fixed,
there is hardly any documentation at all other than your loan application you
need to provide.
For more information or questions about mortgage loans, please call (855) 757-8748.
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