Refinancing your mortgage is a tedious process for most people. Unfortunately, securing a loan as a self-employed borrower will often require that you provide additional documentation to procure your loan if you decide to refinance your property. This common struggle occurs because lenders for self-employed individuals want to make sure that they will be repaid. If you work for yourself, they can’t verify the amount and consistency of your income with your employer as they usually would. 

Thankfully, with adequate preparation and diligent record-keeping, it’s possible to refinance your mortgage while self-employed. Though the process of applying for and securing refinancing of your mortgage is time-consuming and can be fairly intense, it still presents the potential for significant savings over your current mortgage payments, especially as interest rates remain low. Follow these tips and tricks to spare yourself some of the time and hassle of applying for mortgage refinancing as a self-employed individual.

Refinancing your mortgage while self-employed will look different depending on your situation and your lender. Lenders might set out extra hoops for self-employed people to jump through in the application stage. Be prepared to satisfy other requirements as the loan moves forward. You may need to provide more answers to the lender’s compliance or operations department.

As lenders do for every applicant, they’ll look at your credit score and verify your assets, income, and debt-to-income ratio to determine your credit risk. Under typical circumstances, lenders will examine your tax returns, recent pay stubs, and bank statements to make that assessment. Self-employed mortgage qualifications will require you to provide additional supporting evidence to refinance your mortgage. Expect that these documents will receive greater scrutiny, too.

Freelancers or sole proprietors who own their own business will have to provide supplementary proof of income to satisfy the lender’s requirements. Ultimately, lenders need to be satisfied with answers to the following questions to approve your application:

• What work do you do, and where do you do it?
• Is your income stable?
• How financially secure is your business?
• Will your business continue to perform at a level that will ensure you can repay your loan?

There are several ways that you can address these questions. Be prepared to show at least an uninterrupted two-year history of self-employment income records. If that’s unavailable, you’ll need to show self-employed activity for at least 12 months in conjunction with previous employment. 

Lenders might ask you for these documents to verify the nature of your employment and complete your application:

• List of current clients
• Records from your licensed CPA
• Membership to a professional organization
• State or business licenses (including DBA registration)
• Proof of insurance for your business

To confirm your income, be prepared to provide: 

• Personal tax returns (including W-2s if you’re paid by your corporation)
• Bank statements                                                                                                                         
• Profit/loss forms (depending on the way your business is structured, this may include a Schedule C, Form 1120S, or K-1)

While it can be a time-consuming process to apply for mortgage refinancing while self-employed, there are several steps you can take to help navigate the process more quickly and easily. 

1. Get organized and keep good records. Expect to hand over lots of information. If you keep good records and know how to access them, this will make the process go smoothly. Once you get a request from your lender, acknowledge it as soon as possible and comply as quickly as possible. Ideally, you want to present as long a history of successful self-employment as possible to assure the lender of your ability to repay the money borrowed. The more thorough and detailed your records are, the better your application will look to the lender.
2. Watch your credit. While a good score doesn’t guarantee that your application will be approved, it is a crucial component of a successful application. With a higher score, lenders tend to look at your application more favourably, so do what you can to improve your score and keep it high. The higher your credit score is, the lower your interest rate will be.
3. Keep business expenses separate. Using your personal credit cards to charge business expenses will increase your credit utilization and can hurt your credit score. Go through the effort to open business cards for business expenses to improve your personal credit utilization and give a more truthful and accurate representation of the state of your personal finances.
4. Keep a handle on your debt-to-income (DTI) ratio. When your DTI is low, it tells the lender that you have the money to pay back whatever you borrow. Consequently, you pose less of credit risk. If your DTI is greater than 50%, look at reducing your outstanding debts to improve your application.
5. Expect to be Googled. Lenders want to verify the legitimacy of your business, so have a professional website or online presence that shows regular activity. This will be especially important if you are a sole proprietor, or you file your own taxes. You may have to provide additional references of people that you work with if your particular situation calls for that.
6. Don’t go through the application process alone. Independent tax preparers and accountants can lend additional credibility to the documents that you provide as part of your application. These documents are more valuable to the lender if they have been reviewed and processed by a licensed tax preparer or CPA instead of by yourself. It can also be helpful to have your CPA or tax preparer draft a letter on their own letterhead stating that you’ve been in businesses for however long and that they currently or previously managed this aspect of your business for you. You or your accountant can also prepare a detailed Profit/Loss report. Consulting with your tax preparer can help you make sure you don’t write off too much as you get ready to refinance for self-employed. If there are too many deductions on your taxes, and your income is too low, that raises red flags for lenders, and you may not qualify. Expect that if you amend your taxes to show more income, you’ll need to explain why and prove that you paid taxes on the additional income before your lender will move forward with that information. It may be worth the time and effort to do this to present yourself as a more attractive candidate. 

   If you have them, they are an excellent resource for you to use as you put together your application. Informing these professionals that you plan to apply for mortgage refinancing will increase your chances of a successful application, too.

7. Keep some cash in reserve. With substantial liquidity, you can accomplish several things for your lender. If you want to provide a larger down payment, doing that assures the lender of your skin in the game and makes you a better candidate for financing.Large cash reserves also give lenders added security and can make or break your application. Even if you don’t use it as a down payment, these funds show your lender that you’re prepared to navigate any future uncertainty and that you will still be able to make your monthly mortgage payments. Finally, you may need this cash to cover your closing costs.
8. Stay the course. Applying for a refinance mortgage as a self-employed borrower can be a hassle. The paperwork and back-and-forth exchange of information is less than ideal, so stay focused on why you’re going through this. Lowering your interest rates can save you hundreds or thousands of dollars off of your current monthly payments. This makes all the effort worthwhile.

Even as we consider how to move forward in an economy that has been gripped by Covid-19, you can still refinance your mortgage by going online. Just as you would while researching a mortgage or refinancing options, feel free to shop around. Compare potential rates and terms, then whittle down that list to decide which lenders are worth applying to.

A professional loan adviser may have some helpful advice for you as you look for the best deal and learn about everything that you’ll need to contend with along the way. Thanks to technology, you can keep moving forward to better financing while staying safe and find the best mortgages for self-employed borrowers. 

Mortgage refinancing as a self-employed individual is difficult because it requires lots of supporting paperwork for the lender to verify how much you earn and provide them with comfort to ensure that your business will continue to make that much as you prepare to undertake monthly payments for this new loan. These tips will help to prepare and position you to satisfactorily address many of your potential lender’s concerns. While there are plenty of variables depending on the lender and the nature of your self-employment, this overview will give you a head start on what is needed to navigate this process. Feel free to reach out to the team at A and N Mortgage for your mortgage needs.