Are you recently self-employed? Maybe it occurred as a result of the economic disaster that occurred after the housing crisis of 2007. Whatever the case may be, if you own your own business and are making a good living, you are back on the track to good things. What if you obtained your mortgage right before the housing bust and took an adjustable rate mortgage that is about to adjust now and you need to refinance? Your situation is completely different, going from someone’s employee to self-employed. In the eyes of the bank, this is a riskier move, but that does not mean it is impossible to refinance. There are many lenders out there willing to help you out, but you should do these three things first to make sure you are good and ready.
Make your Business Legitimate
Your business might seem legitimate in your eyes, but in the eyes of the banks, it is not until you do a few things:
- Have a licensed CPA prepare your taxes right from the start, if you can. If you have already been in business for a while, get a licensed CPA right away. This ensures that a non-interested third party handles your income and can vouch for the validity of it.
- Have a business license with your name on it. It is not enough to hang a shingle outside and call yourself a business. You have to be a legally recognized business, which is done by registering your business and receiving a license to prove it.
- If you do not have a business license or your business does not need one, be prepared to have your CPA write a letter on his letterhead stating that you have been in business for the last 2 years or longer and that he has been handling your taxes for that period of time.
Have High Credit Scores
This could be the hardest step when trying to refinance as a self-employed borrower. Your credit scores probably took a hit as you started your business. With extensive credit being granted, applications being filled out, and money flying around, your credit score is likely to be all over the place. Generally, lenders want self-employed borrowers to have a credit score over 700. There are simple ways to get this going on your end if you are not there right now:
- Minimize your utilization rate, which means try to pay down as much of your debt as possible. Using more than 30 percent of your available credit gives your credit rating a good beating.
- Make your payments on time all of the time, especially any housing or installment payments.
- Take care of any collections or judgements reporting on your credit report, whether you have to pay them off or just straighten them out, getting them removed from your credit report if they were already satisfied.
Money talks in the mortgage industry. The more liquid money you have available and can prove to a lender, the less risky you become. Being self-employed adds a layer of risk to your mortgage application because you do not have steady income, like you would have if you were a salaried employee. Because of this, lenders need factors that will make you less risky – or factors that will help you continue to make your mortgage payments should your business suddenly begin to falter. Liquid assets, meaning money that is not tied up in any type of investment or collateral can serve as a compensating factor, lowering the risk your self-employment brings. If you do not have adequate savings yet, start saving now and wait to refinance until you have several months to one full year’s worth of reserves on hand.
Lenders want to see that the self-employed have their ducks in a row, so to speak. They want to know that you are not a high risk and that you can continue to pay your mortgage no matter what is going on in your business world. When you have a third-party to vouch for you; have high credit scores; and have plenty of reserves, there are many options for a self-employed mortgage out there for you. Whether you get a stated income loan, bank statement loan, or qualify for a conventional loan with your last two years’ tax returns, there are many alternatives out there – start getting yourself ready today so you can apply!