Mortgage Refinancing For The Self Employed

If you’re a self-employed homeowner struggling with mortgage refinancing there are steps you can take to qualify for today’s low refinance rates. Stated income mortgages are a thing of the past making it much more difficult for self-employed homeowners to get approved. Here are several tips before you refi to help you qualify for mortgage refinancing with today’s best mortgage lenders for the self-employed.

Self Employed Mortgage Refinance

Being self-employed in a difficult economy has enough challenges without making it difficult to qualify for a mortgage when you’re purchasing or refinancing your home. Mortgage lenders view self-employed homeowners as a greater risk than someone who works for a steady paycheck. This is especially true if you haven’t been in business for yourself long. Also, depending how you’ve structured your business for tax purposes, your documentable income can vary greatly from one year to the next.

Being a higher-risk homeowner also means banks and lenders will charge higher fees, offering higher interest rates regardless of your credit score.

How to Document Your Income

The most common way of documenting your income for prospective income is with your tax returns. Mortgage lenders typically want two years of worth of tax returns documented by the IRS to prove income. You can request that the IRS provide the information to prospective banks by submitting form 8221. This gives the IRS permission to disclose tax related information to prospective lenders and document income for two years.

Some lenders may request earning reports from your self-employment and a list of your clientele. This information can be used to supplement documentation from the IRS. This can be helpful when the tax deductions you claim significantly reduce your documentable income. Tax deductions cause problems for many self-employed homeowners when it comes to documenting income because it looks like you earn much less than you’re claiming. It may be necessary to cut back your deductions for several years if you need to document more income in order to get approved.

Manage Your Debt-to-Income Ratio

It doesn’t matter if you work for an employer or are self-employed; mortgage lenders expect you to maintain an acceptable debt-to-income ratio. Debt-to-Income is the portion of your income that goes towards paying your bills each month.

Typically this should not account for more than 36% of your gross income. Also, the housing portion of your debt should be less than 28% of the total. Most mortgage lenders base their debt-to-income numbers against the average of two years of tax returns. This is another area where minimizing tax deductions will help you to show higher gross income.

Maximize Your Cash & Assets

In addition to documenting income with two-years of tax returns from the IRS, your lender may ask for bank statements to document assets. Being able to document that you have a cushion for unforeseen circumstances proves that you are less of a risk for mortgage lenders.

In addition to maintaining assets for documenting bank statements you’ll want to keep a sharp eye on your credit. As a self-employed homeowner you’ll want to maintain a credit score of 740 or better. Keeping on top of your credit isn’t as difficult as you think. You can start by thoroughly checking your credit reports for errors and disputing any mistakes you find.

Paying down the balances on your credit cards is the quickest way to boost your score once you’ve ensured the reports are accurate. Finally, avoid making late payments at all costs.