Self-Employed Refinance Tips

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 1^st and 15^th 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 self-employed.

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.