Refinancing Tips You May Consider As A Self
If you were able to take out a loan to buy your home as a self-employed individual, you probably have an idea already of the refinancing process, the key difference is that no property keys will be turned over to you at the closing table. Keep in mind that lenders implement stricter standards for self-employed individuals who want to refinance. Here are some tips you may want to consider to help you prepare for refinancing:
Understand Why You Want To Refinance
Be clear on why you want to make a switch. This will help you determine whether the benefits of a new home loan outweigh the costs of your current loan.
Some common reasons for a small business owner or someone who is self-employed to switch include:
- A lower interest rate
- Changing your home loan type CommBank customers can do this in NetBank.
Get Approved Easily And Quickly With A Self
With most mortgages, it can take weeks, sometimes even months, for you to get your mortgage approved. In some instances, the lender can even deny your mortgage application. Opting for a self-employed mortgage ensures that you get approved for a stated income mortgage within a couple of hours. Once you submit your mortgage application to the professionals at Harpreet Puri Mortgage, you can rest assured we can get your mortgage approval on the same day in some instances. Depending on how complex your loan request is, we have an extensive network of lenders that work with us closely that can get your mortgage approved in as little as 48 hours. We even have lenders with whom we have a great relationship that approves your mortgage application without even undertaking a credit check. So, even if you have a poor credit score or have outstanding high-interest debts, we can still help you qualify for a self-employed mortgage, and most importantly, find the right solution for you.
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What Is An Asset
An asset-based mortgage is a loan that allows a lender to confirm approval based on the assets the borrower possesses. This way, a borrower can use investments to gain approval for a loan, rather than showing payment from an employer. While a downpayment and decent credit score are still necessary, this non-traditional mortgage is a great option for investors who wish to use their assets instead of their cash. It will allow you to borrow the amount you need, as long as you can prove that your assets can cover the term of the loan.
Gather All Your Documentation
Lenders will require extensive documentation from self employed mortgage loan borrowers to verify their income and make sure the borrower can make their mortgage payments.
Before heading to a lender, do a little prep work by gathering these documents:
- Two years worth of business tax returns and personal tax returns
- Copies of current state or business licenses
- IRS Form 4506-T, which allows lenders to access your tax records
- A profit-and-loss statement, including debts and expenses
- A balance sheet
- Asset account statements, such as retirement or investment accounts
- Any additional income, such as Social Security or disability
The lender will look for taxable income and may subtract anything that doesnt seem stable and consistent.
- A letter from a CPA attesting that youve been in business for at least one year
- Evidence of membership in any professional organizations
- Communications and contracts from current clients
The lender might also request a W-2 from your previous employer. With a strong work history in the same field proven with the W-2 form you might be able to get a home loan with as little as 12 months of self-employed work.
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You Can Qualify For A Higher Mortgage Amount
One of the reasons to apply for a self-employed mortgage is that you can choose to qualify for a higher mortgage amount if the lender accepts the stated income mortgage applications. Unlike traditional banking institutions, they will only consider your mortgage application by viewing your declared net income after tax deductions.
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Do Your Due Diligence When Choosing A Lender
Not all mortgage lenders are created equal, especially for loans to self-employed borrowers. Large traditional banks usually have strict credit standards and a rigid process for mortgages that might not suit a self-employed applicant. Online lenders might be less risk averse but demand a higher interest rate.
Consider smaller banks that specialize in mortgage lending and can offer a personalized service, rather than being at the mercy of an algorithm.
Another option is working with an experienced mortgage broker. A broker who has a history of working with the self employed can more easily guide you through the process and save you the legwork. Mortgage brokers leverage their network on your behalf, with an understanding of your unique circumstances to find you more lending options faster.
What Documents Will I Need To Provide
Mortgage loan officers will want to understand the self-employed borrowers business, their expertise in their chosen field and their ability to earn a stable, consistent and ongoing income for at least the next 3 years.
While underwriting standards will vary based on the lender and the type of loan youre getting, the same types of documents are likely to be required. Heres an overview of some of the common documentation used across the industry:
- Current statement of bond insurance
- A letter from your licensed CPA, enrolled agent or tax preparer
- Letters from clients indicating service has been performed
- A membership letter from a professional organization that can verify through your membership at least 2 years of self-employment.
- Any state license and business license that may be required in your profession.
- Evidence of workers compensation and employers liability insurance.
- A DBA issued at least 2 years ago. If youre using a DBA for verification, you must prove current self-employment with 2 months of recent business account statements, creditor statements or company invoices.
- At least 1 year of both your business and personal tax returns, for income documentation purposes, and W-2s, if your business is incorporated.
- A year-to-date profit and Loss statement, preferably audited by a CPA. Unaudited statements may require most recent business bank statements as well.
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Cons Of Getting A Self
As with any financial option, its important to understand the cons before you make any big decisions:You may not qualify at your bankWhile some A lenders offer self-employed mortgage products, they wont necessarily check all the boxes for you so theres a good chance you may have to apply at a financial institution or lender youve never used before.Higher rates than conventional mortgagesSince the lenders for self-employed mortgages are taking a greater risk by working with a borrower who has less consistent income, their rates will reflect that. If you have a poor or a lackluster financial portfolio, it could further affect your accessible rates.
Disadvantages Of Getting A Mortgage While Self
Lenders don’t always see the self-employed as ideal borrowers. Borrowers who are employees can be considered to be particularly creditworthy because of their steady, easily verifiable incomes, especially if they also have excellent . Self-employed borrowers will have to provide more paperwork to document income when compared to traditional employees who can produce a W-2.
Another problem self-employed borrowers encounter is that they tend to use a lot of business expenses to reduce taxable income on tax returns, forcing lenders to wonder if the borrower makes enough money to afford a home. Finally, banks may want to see a lower loan-to-value ratio, meaning the borrower will need to come up with a larger down payment.
Many lenders are requiring higher credit scores, larger down payments, and more documentation to approve mortgages and other loans. This applies to all borrowers, not just the self-employed, and requirements vary depending on thelender.
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Know What Lenders Want From Self
Lenders ultimately want to make sure self-employed mortgage borrowers have stable income that they can rely on for the foreseeable future.
When applying for a home loan, borrowers will generally need to show at least two years worth of uninterrupted self-employment income. That helps lenders see that the borrower is in overall good financial health.
Options For Mortgage Refinancing When You’re Self
Most mortgage loans are resold to government-backed companies Fannie Mae and Freddie Mac. Loans that qualify for resale, called qualified mortgages, must meet strict criteria. For the self-employed, refinancing into a qualified mortgage may require providing:
- Verification that your business exists
- Business and personal tax returns for the past two years
- A year-to-date profit-and-loss and balance statement for your business
- Your most recent business bank statements
If you don’t have two years’ worth of self-employed tax returns, or if your income has declined or is seasonal, you may want to investigate a non-qualified mortgage. These loans, which have looser criteria than qualified mortgages, are often marketed to self-employed people. Non-qualified mortgage lenders may verify your income using bank statements rather than tax returns or take liquid assets into account when assessing your ability to repay the loan.
If you have a Federal Housing Administration -insured mortgage, consider the FHA’s Streamline Refinancing option. Certain Streamline Refinancing options require no income or employment verification. You just need to have made at least six loan payments on your existing mortgage, be current with no late payments, have had the loan for 210 days, and show that refinancing will either reduce your monthly payment or shorten your loan term without increasing your payments by more than $50.
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Average Clicked On Rate For Refinance Loans
The typical rate clicked on by Bankrate readers for 30-year refinances stood at 4.29 percent Thursday.
You can use Bankrates mortgage payment calculator to find your monthly payments and see the effects of making extra payments. The tool also will help you determine how much interest youll pay over the life of the loan.
Can You Get A Joint Mortgage If One Person Is Self
Maybe you want to apply with a spouse or co-borrower, but one of youis self-employed and the other is traditionally employed.
Most mortgage lenders will be fine with this, provided theself-employment income meets the guidelines listed above and both applicantsmeet loan requirements.
You also have the option not to count your co-borrowersincome source if you wish.
If you qualify for a loan with your ownincome, and your co-borrower is self-employed, lenders can ignore that businessin underwriting.
Why would you want them to ignore that business?Because many small ventures, or even larger start-ups, dont show income on taxreturns. At least on paper, they generate losses.
While these business write-offs are great for reducing taxes, they can reduce your qualifying income when you apply for home financing.
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How To Obtain The Best Interest Rates For A Self
If you are a self-employed individual looking for the best and lowest mortgage rates possible, you must ensure you follow the below-mentioned tips:
- Go through your credit report to identify and correct errors that can help improve your credit score. Try to aim for a credit score of 720
- When applying for a self-employed mortgage, try to place a sizeable down-payment amount that you can afford.
- Do your due diligence and research to find various mortgage lenders and rates, including research on which lender is providing the best terms as well.
- Choose a mortgage with a shorter term. If you choose a twenty-year or a fifteen-year mortgage, you may get it with a lower interest rate.
- Try to pay upfront it may help lower your interest rate.
Tip : Keep An Eye On Your Credit
Lenders look at your score as an indication of your ability to repay your debts. It doesnt take your income into consideration. Unlike your DTI, the higher your credit score, the more favorable position youll be in for a mortgage.
Another factor to your credit score lenders consider is your credit utilization. This ratio measures how much of your available credit you use.
For example, if you have a credit limit of $10,000 and have a $6,000 balance on it, your ratio is 0.60, or 60%. Like your DTI, the lower your credit utilization ratio, the better it is for your credit score, which means its better for your mortgage application.
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Mortgage Lenders Only Count Taxable Income
If you hope to buy a house or refinance while self-employed, thispoint is key: lenders only count taxable income toward your mortgage.
Underwriters use a somewhat complicated formula to come up withqualifying income for self-employed borrowers. They start with your taxableincome, and add back certain deductions like depreciation, since that is not anactual expense that comes out of your bank account.
Business owners and other self-employed workers often take as manydeductions as they can. While this can save you a lot of money come tax time,it can also hurt you when it comes to your mortgage application.
For instance, say you earn $6,000 a month. But after deductions,your taxable income is only $4,000 per month. Heres how your home buying budgetchanges:
| Monthly Income |
| $250,000 |
*Example assumes a maximum debt-to-income ratio of 36%
In this example, losing $2,000 off your monthly income reduces yourhome buying budget by more than $150,000.
Some self-employed borrowers get around this issue by using a type of mortgage called a bank statement loan, which lets you qualify based on total funds coming into your bank rather than tax returns.
However, bank statement loans are considered non-qualified mortgages. This means they lack some of the consumer protections of major loanprograms and have higher interest rates.
The majority of self-employed borrowers stick to mainstream loan programs with lower interest rates, even though their loan amount may be smaller.
The Value Of Appraisal When Refinancing And Self
One final note should be considered for anybody seriously working toward a self-employed refinance loan. Most banks will require that the home be appraised again to determine value and equity.
If the market has been booming, this could result in more value in the home. And thats excellent, especially for someone looking to do a cash-out refi. However, if things are on a downward trend, you may want to wait on doing the appraisal. Thats because your lender could have a harder time underwriting the loan amount you desire, as the industry has restrictions on how much it can loan out compared to overall value of the home.
If being self-employed is your goal, then dont let the mortgage and refinancing challenges deter you. Just know from the start, that excellent record keeping, strong credit scores, and accurate reporting of your income will go a long way in delivering the mortgage or refi of your dreams.
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Are Stated Income Mortgages Illegal
Stated income mortgages are not illegal in Canada. Stated income mortgages became illegal in the United States after the Frank-Dodd Act in 2010 required borrowers to prove their income for owner-occupied properties.
TheEligible Mortgage Loan Regulationsunder Canada’sProtection of Residential Mortgage or Hypothecary Insurance Actstates that mortgage lenders must verify the borrowers income and employment status if they are employed. For self-employed borrowers, lenders just need to judge if the income reported by the self-employed borrower is plausible.
In other words, the stated income that a self-employed borrower declares must be reasonable. To do this, lenders will look at the industry, how long you have been in business for, and your occupation. For example, freelance photographers make roughly $40,000 per year in Canada. If a self-employed freelance photographer in their first year of business declares a stated income of $400,000 per year, their self-employed mortgage application will most likely not be approved. Their income will need to be verified in this case.
Analysis Of Your Personal And Business Income
Most lenders analyze self-employed income based on some version of Fannie Maes cash flow analysis Form 1084. The method used to come up with self-employed income varies depending on whether your business is a sole proprietorship, partnership or corporation.
Lenders also want to make sure your business is healthy. They review how much debt the business is taking on and whether the income is increasing or falling from year to year. Even if a sudden drop in business income doesnt affect your personal income, a lender could look at it as a red flag in your financial future.
The type of business structure you have set up may also trigger additional requests for information. We definitely get more for Schedule C/sole proprietorship borrowers, Melwani said. If its a partnership or a corporation it probably looks more established in terms of the banks point of view, Melwani added.
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