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