How to Successfully Refinance While Self-Employed
Low interest rates for 30-year mortgages mean that almost 6 million homeowners have the potential of saving a lot of money by refinancing. Does being your own boss mean the door to refinancing is closed for business? Definitely not.
According to federal statistics there will be over 40 million self-employed Americans by the year 2020. Some of those include sole proprietors of full-time businesses and many are freelancers in what is referred to as the “gig economy” – Uber drivers, writers, etc., who may not rely on that income completely. The reasons for this trend may involve the appeal of freedom, flexibility or outright necessity, but it’s definitely shaping how we save, spend, borrow and generally manage our money.
If you bought your home when you were traditionally employed and wish to take advantage of the current rates and increasing home values in order to refinance, but you aren’t sure how to go about it now that you’re self-employed, we at EnTrust Funding (ETF) can help.
When refinancing your home lenders typically ask for two years’ worth of tax returns. However, as a small business owner if you no longer receive W2s you can alternately provide proof of income through profit & loss statements, bank statements, or independent contractor tax forms – anyone who receives over $600 in payment from one source in a year requires a 1099.
If your business is newer than two years, but it’s in the same industry or field as your previous employment, there is even more flexibility with FHA and other programs.
DEDUCTIONS & DEPOSITS
One of the catch-22s that sole-proprietors and contractors may face is determining what to deduct in order to offset self-employment taxes. Creative deductions may end up reducing your reportable income but lenders like ETF look at total deposits, not just profits and losses. Consider giving yourself a raise – even if it’s only on paper, you’re worth it!
When seeking to refinance with or without a steady paycheck, your credit profile and debt threshold are considered. An irregular income can sometimes impact timely payments on mortgages or credit cards and other debts which will ding your FICO score, but that doesn’t rule out qualifying. While a score of 620 or lower is considered a minimum there can be flexibility with FHA, and smaller lenders have even more options such as “band-aid” loans. A debt-to-income ratio may be higher than industry minimums as you build your business but doesn’t rule out qualification when alternative lenders can look at the big picture.
There’s no doubt that the equity in your home creates a nice, natural savings which makes refinancing an appealing option. A more substantial amount of equity can favorably impact your qualification further. And when you rely on your own business for income, a lender will also take a good look at a healthy savings or IRA balance in the bank: is that amount divided by 12 months adequate to provide a cushion in potentially slow times? Set up an automatic transfer each month and you’ll barely notice it until you need it.
As we previously shared regarding nontraditional borrowers and sole proprietors, we at ETF understand that life happens while pursuing your dreams. Which is why we offer several great programs that use your equity, bank statements, assets and other tools to qualify you for a refinance. We also appreciate how busy you are so give us a call and let us simplify the process for you.