People say war is hell.
I don't know about that, but I can tell you from my personal experience that refinancing is hell, and a special corner of this hell is reserved for people who have the temerity to be self-employed as I am and have been since 2004.
Refinancing is complicated, uncertain, nerve-wracking, time-consuming and expensive. I could go on, but I'll stop there so I can get to the good stuff. When all was said and done, I was able to obtain a new 30-year mortgage with a rate very close to the average market rate at the time. Incredible, but true.
Credit score and LTV
Two components of my refinance were certain to be problem-free:
- My credit scores are in the 800-plus range since, after all, I do write about personal finance for a living, so I should know how to manage my money.
- My 1,200-square-foot house in Los Angeles is worth more than double my loan amount, giving me a loan-to-value ratio of less than 50 percent.
I had a rate-and-term refinance with no cash out, and my loan amount increased only $400. That extra was applied to my closing costs, the rest of which I paid out of pocket.
Steady income: The major stumbling block
The big stumbling block was my income, and not the amount, but rather my inability to produce a W-2 form that showed I was a full-time employee with a steady paycheck. The lender pulled my federal income tax returns for the last three years from the Internal Revenue Service, and those documents showed I was a reliable, consistent earner, but not even Schedule C offered any clues as to whether my sources of income, which include HSH.com, would continue.
To verify the information, the lender requested the name and telephone number of my tax preparer, which I was unable to produce since I prepare my own returns and have done so for all but two years of my adult life. I'm a financial writer, remember? But still, a self-prepared return by a self-employed borrower seemed to stump the lender.
Verifying my income
At this point, refinancing became significantly more uncomfortable. First, I was informed that the lender had researched me online, using my website and published works as though they were financial documents. I'm a private person by nature and this investigation, though limited to public information, felt creepy and intrusive.
Next, I was asked to give the lender the names and telephone numbers of my clients. I refused, explaining that my refinance was no business of my editors and that I didn't want them inconvenienced with telephone calls requesting information about me. I was mystified by the lender's interest in my clients since self-employment is by definition at will. Since no one has any obligation to continue to hire me, this further intrusion seemed pointless.
My refusal was elevated up the chain of command within the loan company, but to no avail. I had to hand over the names and telephone numbers or my loan would be denied. Ouch. In the end, I complied, calls were made, clients were helpful and the loan went forward. But the lender's invasion of my business still rankles. Two days later, the loan closed.
Advice for a self-employed refinance
That brings to me to my advice for other self-employed homeowners looking to refinance:
- Allow plenty of time for your loan to close. I applied for my refinance in early January. The target closing date was the end of that month, but fortunately, I had a 45-day rate lock and almost every one of those days was needed to resolve the income verification issue.
- Prepare all your information. Be prepared to provide not only the standard documentation, but also other information about yourself and your business. Three years of tax returns wasn't enough to prove I was a legitimate income-earner.
- Expect to be Googled. Some of my social media accounts have tight privacy settings; others I've set up to be more public. What did the lender find out about me? I don't know.
- Be responsive. Acknowledge every request or question you receive from the lender as soon as possible, even if it's just to say you received the request and will respond further as soon as you can. It can't hurt to demonstrate that you're competent and responsible.
- Focus on your goal. As much as I disliked the lender's inquiries, I was happy with the rate, costs and terms I was quoted and I was pleasantly surprised when the numbers matched up at closing and the loan I received was the loan I'd been promised.
Now that the refinance is done, I have to say the hassle was worthwhile because the low rate and lower payment are heaven.