When a mortgage lender meets with a potential homebuyer, here’s what they’re hoping to see: A big, steady paycheck at a full-time job. Sorry “Mr. Banker,” this is not the reality of today’s homeowner.
For years, the US has been shifting gradually towards a gig economy — a term that refers to the legions of freelancers, contractors, and self-employed who don’t necessarily have a 9-to-5 job and a weekly paycheck.
Let’s take it one step further, from May 30th, 2020 Forbes Magazine nearly 30% of Americans are self-employed. Those that are not a part of the “gig” economy. This may include you, owning a construction company, bakery, real estate agent, artist, architect, and everything else in-between.
What does all this mean? Contrary to what you may read online, being self-employed does not mean it is harder to do a refinance. It is just different. Does this mean your local bank or credit union is equipped to provide such a mortgage? Most likely not. Not to put down your local bank, but they thrive in a “cookie-cutter” scenario. It takes a mortgage or refinance professional to get the job done.
Here are a few items to help the process:
Documentation is your friend
Even if freelancers have up and down months, you want to show lenders your long-term averages. That means furnishing at least a couple of years of documentation, which will let lenders see the numbers in black-and-white and help them breathe easier. In general, a lender will want to see a two-year history of earnings to establish an income pattern. Documentation will be 1099’s, merchant statements, bank statements, contracts, accounts receivable, if you can demonstrate more than that, even better.
Clean Up Your Balance Sheet
Be cautious and lower your credit utilization rate. The percentage of your total credit limit that you are currently using, as low as possible, preferably 30% or below. Pay your bills on time, every month, and pay down any revolving debt. Don’t open a flurry of new credit cards or loans. This is of key importance, you don’t want to have the perception that you are cash poor or your business is struggling.
When it comes to taxes, there is a constant caveat. Self-employed workers generally try to write off as much business expenses as they legally can. That reduces taxable income, which helps come April 15. However in terms of banks looking at a potential borrower, the higher income, the better. The moral of the story: Don’t go crazy with deductions. In reality, you can always amend a return though a licensed CPA or financial professional. Let them know you are considering a refinance and have them assist in putting your tax returns in a different light.
In the end, the best course of action? A strong seasoned mortgage professional. A partner that understands the industry and is well versed in self-employed mortgages. It starts with a plan. Let’s get that plan started here.