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See what's happening with home values in more than 400 metropolitan areas with HSH's Home Value Tracker, just updated though the second quarter of 2022.

How to refinance when you are self-employed


Qualifying for a mortgage loan can be difficult if you're self-employed. That's especially true if you report your income on Schedule C for federal income tax purposes.

"The ones that usually have the hardest time qualifying as self-employed are not those who are involved with a corporation," says Ryan Leahy, sales manager at Mortgage Network, a mortgage loan company in Danvers, Mass. "They are the sole proprietor."

Difficult, yes. Impossible, no.

Steady income: the major stumbling block

When I refinanced as a self-employed borrower in 2014, I was able to get a new 30-year mortgage with a very favorable rate. But the process was complicated, uncertain, nerve-wracking, time-consuming and expensive.

My credit scores were in the 800-plus range and my house was worth more than double my loan amount, giving me a loan-to-value ratio of less than 50 percent. I didn't take cash out, and I paid all but $400 of my closing costs out-of-pocket.

The stumbling block was that I had to prove that my freelance income was consistent and reliable. The fact that I'd prepared my own tax returns made that even more difficult. The lender's solution? They researched articles I'd published online and demanded the names and telephone numbers of my editors. I complied, calls were made and my loan closed.

What's changed for self-employed borrowers

Leahy says extra hoops are still common for self-employed borrowers. Some occur at the application stage, others when the loan moves forward to the lender's compliance or operations department.

Your accountant or tax preparer might be able to help. Ask for a letter on his or her letterhead stating how long you've been in business and that your business is still a going concern.

Another helpful document may be a Profit and Loss (P&L) Statement prepared by you or your accountant. A P&L shows your business's income and expenses during a specific time-period. If you applied for a loan in early 2018, you might be asked for a 2017 P&L, showing how your business performed after 2016, for example.

"If you made $100,000 in 2015 and $100,000 in 2016, and your P&L shows net income for 2017 was $28,000, that would raise a red flag," Leahy says.

Your tax preparer can also help you make sure you don't take so many deductions that your income is too low for you to qualify.

"Tax preparers know that if there are too many write-offs and the bottom line is low, the borrower may not qualify for a mortgage loan," Leahy cautions.

If you amend your tax returns to show more income, you might have to provide both the before and after versions as well as a written statement that explains what you changed and why, and proof that you paid any additional tax that you owed as a result.

Advice for a self-employed mortgage refinance

Follow these tips:

  1. Allow plenty of time to close. I had a 45-day rate lock and needed almost all of those days to resolve my income verification issue.
  2. Prepare all your information. Be ready to provide more than the standard documentation.
  3. Expect to be Googled. Have a professional website or online presence that shows your business is legitimate.
  4. Be responsive. Acknowledge every request from your lender as soon as possible, even if it's just to say you received it and will comply as soon as you can.
  5. Focus on your goal. The paperwork can be a hassle, but in the end, you should be happy with your new mortgage loan.

Mortgage loan guidelines are complicated, and there can be exceptions every step of the way from application to closing. Shop around, ask questions and discuss your personal situation with your mortgage lender.

(Photo: alexskopje/ThinkStock)

Caroline Collins January 1, 2019 11:24 pm

A financial blogger said there was a way to qualify for a HARP refinance with a bank balance sufficient to cover a year's worth of payments, for people whose income is hard to document or fluctuates a lot. Quicken denied knowledge of this HARP-qualification method. I know HARP ended, but I'm curious about this. Do you know if the blogger was correct?

Editorial Team January 3, 2019 7:34 pm

In HARP cases where the refinanced payment had less than a 20% increase above the old, lenders were permitted to use a "Reserve Alternative" method to verify sufficient income for the new mortgage. From the Fannie Mae "Selling Guide" (Selling Guide B5-5.2-02: DU Refi Plus and Refi Plus Underwriting Considerations)Reserve alternative: Verification of liquid financial reserves equal to 12 months of the new mortgage payment (PITIA) on the subject property. These reserves must be documented with at least one recent statement (monthly, quarterly, or annual) and are limited to the following types of liquid assets:checking or savings accounts, certificates of deposits, and money market funds;investments in stocks, bonds, mutual funds; andthe amount vested in a retirement savings account (that is available to the borrower).Lenders are not required to investigate large deposits that appear on the statements. However, certain assets must be “discounted” when used for reserves.

Robin September 19, 2016 8:30 pm

Nice sage advice! Thank you

manuel May 10, 2016 10:12 pm

I was denied for a refinance with a harp lender.due to my income as self employed.never been late on a payment since 2006.but on paper the numbers are low.does any body knows.what to do?called the bank that has my loan.closing cost were higer,possible morgage insurance if value is less than expected,plus apraisal.from an ARM to a fixed ,and closing cost and fees up to 4,000.00.and after all said and if done, no monthly savings.except a fixed rate.

true grit October 22, 2015 1:37 pm

I was recently turned down for a re-fi of a heloc by the very bank that made the loan in the first place. Here are the facts. I have 4 condos worth total $850,000. 1 owe 36k 1 owe 26k 1 owe 8k 32k heloc 1 free and clear. $20,000 cash in the bank, no credit card debt, no automobile debt. $4200/mo income. They charged me $500 "application fee" ran me around for two months, reported the loan in default after refusing any payments and then turned me down for the $32,000 loan. They stole my $500. I think they turned me down because they think I can't pay the loan back and they can forclose. I'm paying it off in full today!

Editorial Team October 27, 2015 8:57 pm

True Grit, Unfortunately, there is not enough information in your comment to help us fully address your concerns -- we are left with more questions than answers. Here are some questions we have: 1. What reason did the bank give you for turning you down? They have to give you a reason. 2. Are you self-employed? Do you have consistent income from a source other than investments? 3. Did you have trouble compiling the necessary documentation to support the loan application? Unfortunately, your bank is not required to return the $500. That is theirs. We would love to help you further. Thanks for writing in, we hope to hear from you soon. -Tim Manni, HSH.com.

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