If you run your own business (25% or more), are a gig worker or independent contractor — and you want to refinance, it could be more challenging for you to secure financing. It can be harder to prove how much income you have without a steady paycheck or W-2. That’s why most lenders have stricter rules for self-employed borrowers.
Is it difficult to get a mortgage when self-employed?
It’s a common misconception that it’s always more difficult for self-employed applicants to get a loan than regular salaried or hourly workers with a W-2 from their employer.
In all cases, the basic criteria to get approved are the same: You need to have a good credit history, sufficient liquid available assets and a history of stable employment.
Challenges can crop up, however, if you’ve only been working for yourself for a short time or make less money than lenders prefer. Self-employed borrowers often take full advantage of the legal tax deductions and write-offs that are allowed by the IRS; unfortunately, this means that they often show a low net income — or even a loss — on their tax returns. That can make it tougher to qualify for a mortgage. You need to work closely with your CPA to ensure he or she knows you are looking to refinance your mortgage. That you need to have tax returns and financial statements that show the strength of your income and business.
The self-employed mortgage has been changing. Before the 2008 housing crisis, this would’ve been less of a problem. Loans that required no documentation or stated income were readily available to borrowers. Today, lenders scrutinize income and other qualifications more thoroughly, particularly in the last number of months due to the coronavirus downturn. This means documentation is king!
Here is where you are focused:
- Two years of federal income tax returns (personal and business)
- Recent business bank statements
- A year-to-date profit-and-loss statement that shows revenues, expenses and net income
- A copy of your business license
- A letter from a CPA verifying that you’ve been in business for at least two years.
- Your credit score and credit history, focusing on ensuring this is tight and right.
- Always make sure you separate business and personal expenses.
- In preparing for a refinance, steer clear of expensive business loans you personally guarantee. IE. Kabbage or receivable financing companies.
Number 1 item to keep in your mind, stop being rate sensitive. Your mortgage rate is the most irrelevant piece of a mortgage transaction. What you care most about is your debt burden. Your ability to access cash. Fund your business. Payoff debt, real debt. Your mortgage is as important and critical at 7% as it would be at 2.85%.
Work with an experienced loan officer who understands self-employed business records and documentation. This person can help you present your business earnings and liabilities in a clear and understandable way that facilitates the approval process.