The SCOOP! Blog by® Your Best Rate Guru

5 Refinancing Tips for the Self-Employed

September 4th, 2014 9:41 AM by Jackie A. Graves, President

5 Refinancing Tips for the Self Employed photo

Refinancing your mortgage can be a good way to gain new control over your cash flow with lower mortgage payments or to strengthen your overall financial position with a shorter loan term.

But regardless of your goals for refinancing, if you’re self-employed, you’ll need to be prepared for an even more rigorous loan qualification process than borrowers with wages from an employer.

Mortgage lenders typically view self-employed individuals as somewhat riskier than other borrowers, because their income fluctuates.

Many self-employed business owners also reduce their income for tax purposes by deducting their business expenses.

Lenders must verify self-employed income based on their tax returns, which in some cases can limit their ability to qualify for a loan.

Five refinancing tips for entrepreneurs

If you’ve been self-employed for fewer than two years, it is close to impossible to find a lender who will approve a refinance. You won’t have the minimum of two tax returns to prove your income, and you won’t have a track record of stable or increasing income from your business.

Some lenders may be willing to make an exception to the two-year rule if you’re self-employed in the same field as your previous job—and all other factors such as your debt-to-income ratio, your credit profile, your assets and your home equity are all strong.

Once you’ve passed that two-year mark, the following five tips can improve your chances of a loan approval.

1. Prepare accurate profit and loss statements. In addition to your tax returns, many lenders require a profit and loss statement from borrowers to provide a clear picture of their business. If you’ve been self-employed for multiple years, you can provide a financial statement showing the trajectory of your income to prove you have a viable business.

2. Have a robust savings account. Self-employed individuals should always have a large emergency fund in case their income fluctuates more than usual. This will also prove to a lender that you will be able to make your mortgage payments even if your income temporarily declines.

3. Maintain a high credit score. A credit score above 740 or 750 is required to pay the lowest interest rates; a high score also demonstrates your ability to handle credit. Check your credit before you apply for a loan and see if you need to take steps to improve your score.

4. Reduce your debt. While it’s important to have a strong savings account, you also need to make sure your debt-to-income ratio is as low as possible. Lenders will sometimes loan to borrowers with a maximum ratio of 43%, but a lower ratio will improve your chances of an approval.

5. Shop around for a lender and a loan. Lenders have different credit standards and loan programs, so if you don’t qualify with one lender, it’s worth it to consult another. You can also look into a longer or shorter loan term and a government-insured or conventional loan to see if a different program may be a better fit for your circumstances.

By: Michele Lerner | Updated from an earlier version by Emmet Pierce.

To view the original article click here

Posted in:General
Posted by Jackie A. Graves, President on September 4th, 2014 9:41 AM


My Favorite Blogs:

Sites That Link to This Blog: