Tips for Refinancing a Home Loan While Self-Employed
Refinancing in 2020 while Self-Employed
According to new research, 28% of U.S. workers were self-employed at some point during 2019 – about 44 million people. We can probably expect these numbers to change even more after this year, given the impact of the pandemic. Many independent contractors have seen their business take a hit and many traditionally employed people who lost their jobs may consider starting their own venture, as well as securing gigs and side hustles to stay on solid ground.
The good news is, the CARES Act (Coronavirus Aid, Relief and Economic Security) provided first-time, expanded unemployment benefits to many qualified, self-employed Americans – 14% of whom declare their own business as their primary job.
Can You Refinance if Self-Employed?
While, there’s no doubt the economy has been dealt a huge blow from COVID-19, the housing market has remained strong in most regions. Also, the Federal Reserve has kept interest rates significantly low, and have vowed to keep doing so as our nation begins the recovery process.
Which means that in addition to federal financial assistance, many self-employed homeowners have been able to acquire relief or reinforcements through the equity in their home by refinancing. Yes, even in 2020.
Refinancing your current mortgage can be a great decision with an eye on long-term goals – especially if you’re looking to save money during unpredictable times, or to take cash out of the equity in your home. The basic qualifications that lenders look for with independent contractors and business owners are:
- Income stability
- Consistent or predictable work
- Healthy credit history
- Low DTI, or debt-to-income ratio
- Adequate LTV, or loan-to-value ratio
If you purchased your home while self-employed then you probably know what to expect – and what’s expected – for the mortgage process. The main differences from traditional borrowers lie in income documentation. When you don’t receive a W2 or pay stubs for all or part of your annual income, you’ll need to provide alternative proof in the form of tax returns, profit & loss statements, and bank deposit statements.
Independent contractors who receive more than $600 from one source in a year require the tax 1099 tax form to file. Deductions and expenses may reduce your annual reportable income, but a lender will often consider the total deposits in addition to the P&Ls. Fannie Mae and Freddie Mac have changed some of their documentation requirements this year for self-employed borrowers to reflect potential impact from the COVID-19 crisis, so be sure to ask your lender if it’s applicable.
Even if your business is newer and has less than the two years of documented income required, there can be some flexibility in refinance programs if you’re still in the same industry as your prior employment. The consistency is key.
Being your own boss can sometimes come with pitfalls that impact your credit rating; irregular monthly income, occasional late payments or higher debt-to-income ratio. However, a lower-than-ideal FICO doesn’t necessarily disqualify you. Thanks to some FHA programs, smaller lender options or band-aid loans, your “big picture” could overshadow a score in the 600 range.
Other significant factors in securing a timely mortgage refinance include your home’s equity and your financial cushion. If your home is now worth quite a bit more than the loan you’re pursuing (LTV), that can reflect well on your interest rate. Additionally, if a lender sees that you currently have a robust savings or IRA, they’ll be more confident in your ability to pay the new mortgage and ride out the rough times.
What Should You Do Next?
The benefits of refinancing vary for every individual homeowner, whether traditional wage-earners or self-employed, in normal times or in 2020.
- Lower interest rates and substantial equity can equal lower, more affordable, monthly payments.
- Converting from an adjustable rate mortgage (ARM) to a fixed rate loan can provide much needed stability and predictability.
- Reducing the term to 15 or 20 years can save thousands in the long run.
- Qualifying borrowers can eliminate the private mortgage insurance from the original loan.
- Tapping the home’s equity in a cash-out refinance can be used to re-invest in your business or create a nest egg, providing more peace of mind.
If any of these are motivating factors for you, the prepare now. Check your credit standing and resolve any problems or errors, if possible. Gather and organize the necessary documentation that you needed for the first mortgage. Shop around.
At Titan Mutual Lending Inc., we understand the dreams as well as the struggles of small business owners and sole proprietors. Contact us to discuss your refinancing possibilities so you can not only survive, but thrive, in 2020.