Mortgages For The Self-Employed
When you are applying for a mortgage, usually the lender will focus on your financial history over the past 2 years. If you are self-employed, that changes the usual process a little. For one thing, you probably won’t be able to provide W-2s or paycheck stubs.
The lender will be concerned with your financial stability, and the financial health of your business. The lender will be checking two sets of documents – your personal financial records, as well as your business records.
You’ll need to supply your personal income tax returns for the past two years. If your company is incorporated, you’ll also need to supply two years of income tax returns for the business. The lender will often also request a current balance sheet for the business, as well as a current profit and loss statement. The lender will check the credit rating of your business, as well as your personal credit rating. Both will be considered in approving the loan.
The documentation you’ll need to furnish, and the way it’s viewed by the lender, depends on the structure of your business:
Your taxable income (or net income) is considered your total revenue (or total income) minus expenses.
The lender will need to see your corporate tax returns for the past two years, as well as your personal tax returns.
If your company is a partnership, the lender may ask for two years of tax returns from the business.
For a long time self employed people, company directors, freelancers and people on bonuses have found it difficult to get finance for their home on a mortgage. The problem is for tax reasons the self employed person minimizes their income however in many cases they will earn much more than can be proved through certified accounts or tax returns. Because traditionally a bank or building society will only lend you 3.5 X your earnings this limits the borrowing amount of self employed people, company directors, freelancers and people on bonuses to much lower than they can afford.
For self employed people, company directors, freelancers and people on bonuses there is a specialized mortgage product called a self certification or self cert mortgage. When applying for a self certification or self cert mortgage the application just asks you how much you earn per year. The main difference here though is that you are not required to prove your earnings, the lender just trust what amount you disclosed to be correct.
Understanding the Self Employed Refinance Mortgage
The facts and figures that make up financial information are important for every homeowner. However, for the self employed, they are crucial. It’s harder to refinance with only self employment income, so what your credit report says is going to make a huge difference. Just having declared income or non-traditional ways of reporting can impact the bottom line, and a poor financial history can actually push a homeowner over the edge and to a point where the mortgage refinancing for self employed may be cost prohibitive. It’s especially important to keep track of the credit score, equity in the home and the total amount of debt that the homeowner carries.
The Question of Income for the Self Employed
In most cases, the biggest challenge for home refinance for the self employed is income. Refinancing for self employed homeowners works the best when the most income is claimed. This opens up better rates and qualifies the self employed business owner for higher loan limits. However, most refinance loans for self employed homeowners use the 1040 form’s taxable income after deductions as the income level. Of course, self employed people are going to write off as much as they can, which often reduces their reported income to levels much lower than what they are financially capable of. This creates quite the conundrum. For the best terms and rates, a self employed person should have at least two years of verifiable self employed income. If this is not available, it’s possible to “declare” income using things like a profit and loss statement, but these loopholes are getting more difficult to utilize. If a homeowner knows they are planning of delving into a refinance mortgage self employed, it can make sense to take a tax hit in order to have tax returns that lead to an easier loan application process.
The Value of Appraisal when Refinancing and Self Employed
One final note should be considered for anyone that is seriously working toward refinance loans for self employed people. Most banks will require that the home be appraised again to determine value and equity. If the market has been booming, this could result in more value in the home. However, if things are on a downward trend, it may not be a positive thing for the appraisal. In this case, a lower loan amount could be awarded or it might make sense to wait until things look up before refinancing.
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