Based on the past mortgage boom and subsequent bust, self-employed borrowers have been impacted greatly. The ‘stated loan’ of yesterday has gone the way of the buggy whip. The fraudsters butchered that particular mortgage loan by turning them into liar loans. The whole idea of stating some one’s income was a sign of how out of control the real estate and mortgage industries had become. Proving your gross income and determining your debt to income ratio, is the baseline of the pre-approval process for a mortgage refinance.
When it comes to your mortgage refinance, self-employed borrowers are going to be challenged more than ever with the tightening of guidelines and anti-fraud measures now in place.
What self-employed borrowers should expect when applying for a mortgage refinance:
-Full tax return disclosure, business and personal for at least 2 years
-Adjusted gross income will be the effective gross income
-All business expenses must be reasonable and with-in industry standards
-Schedule E and other expenses must be fully disclosed and accurate
-Prepare to provide all incorporation documentation and identification of all owners/partners
-Married partners may need marriage licenses
-Lenders will perform INCO check, to verify the tax returns that are due, have been submitted with IRS or extensions have been filed
-All bank accounts must be disclosed, it is best to have sufficient funds and cash flow in your personal accounts
-If funds from business accounts are utilized, be prepared for detailed explanations, underwriters are not fond of business funds used for personal use.
-Documentation will need to be provided how business account withdrawals will not negatively impact business operations and cash flow
-Prepare to explain deposits into your accounts and unusually large deposits, especially if you have a relatively new business or very tight debt to income ratios
-You will need a two-year self-employment history
-Expect scrutiny on handwritten documentation and checks
-Direct deposits, wire transactions are preferred when analyzing bank accounts
-Be prepared to explain one time, large expenses that are not reoccurring
-Depreciation on tax returns can be returned to the asset side of your income statement
-The newer your business the more scrutiny you will receive, 20 years of self-employment speaks for itself
-The more organized and detailed your documentation, the better.
-All gift money needs total documentation from origin to destination, bank statements reflecting every aspect of the gift money transaction (for FHA and VA loans)
-Be prepared to document and explain how you pay yourself
-Addresses must match up with business licenses, taxes, drivers licenses, etc…. Different and mismatched addresses across the file will cause problems
Longevity, organization and proper documentation are paramount for self-employed borrowers. Newer businesses will receive more intense analysis for obvious risk reasons. If paperwork is disorganized and sloppy, take the time to get organized, it will help the business in every way.
If the accounting for the business is air tight, expect a relatively simple approval process. If the accounting is sloppy and dis-organized, look for heavy scrutiny and a lot of questions and explanations.
If the business is not organized, you need to get that way, the business will benefit and prosper in many ways.