Finance

How to Refinance When Self-Employed

By Tom Burchnell

If you bought your current home while self-employed, you might already know that there can be extra steps involved in proving your income. But if you own a house and self-employment is new to you, it’s important to know your options for refinancing.

So, how do you access your home equity or renegotiate your mortgage terms as a self-employed person? 

The good news is that you have several available paths for presenting an acceptable picture of your income. In addition, you may be able to find a route to your equity that skips the home loan qualification process entirely. 

Whether you’re looking to refinance your home to pay off debt, get a lower interest rate, or help pay for home improvement projects like garage financing, let’s take a closer look at the how-to of self-employed refinance mortgages. 

Is It Hard to Refinance When Self-Employed?

To ensure you have the financial options you need, when you need them, any sole proprietors and freelancers who own homes need to understand how to refinance when self-employed. 

Overall, the information your loan officer needs, like your proof of income and work history, helps them to predict your future income and your ability to repay them. Mostly, the process for self-employed earners is the same as for W-2 employees. However, self-employed people may be required to submit additional paperwork for proof of income. 

The other requirement of proving your self-employment income is that your work history needs to show a consistent and steady income.

For instance, maybe you’re a dedicated odd-jobber, and your sole proprietorship is “John’s Errands & More,” and you regularly take on jobs under this business category. In this case, your work can be identified as a distinct business and considered in terms of profit and loss that amounts to qualifying income.

However, perhaps you don’t have a single, stable income source, but still consider yourself self-employed. Maybe you try out graphic design freelancing for a few months, then do some work as a wedding planner, consult as a financial planner, and market yourself as a neighborhood pool cleaner.

In this situation, even though you might earn a living through your combined jobs, you can’t add the income together to create a stable self-employment history. Each endeavor would need to be evaluated separately and would likely be counted as contributing to a consistent income stream. 

How Does Side Hustle Self-Employment Affect Your Proof of Income?

Say you have a full-time job at an office, but also do some odd jobs on the side. Will this help to boost your income and work history when refinancing? 

Like with other types of self-employment work, it depends on the nature of your work and how stable and consistent it is. If you have a position as a W-2 wage earner plus do some freelancing part-time, that extra income can only be included if it follows the two-year guideline above.

Lenders generally aren’t interested in one-off extra income to help predict future earnings. Thus, if you occasionally do a side job here or there, especially of different types of work, it likely can’t be counted among future earnings to predict your ability to repay the home loan.

However, if you can prove consistent, predictable earnings through your side hustle, you may still benefit from reporting those earnings in your proof of income.

How Long Do You Have to Be Self-Employed to Refinance?

When reviewing your work history, mortgage loan providers look for a two-year history of employment. This guideline is the same for those who are self-employed. In general, lenders look for a history that: 

  • Shows consistent income
  • Does not show a year-over-year decrease in income level
  • Displays a two-year match between income and bank records 

If you have a longer work history in your current field, it may help to provide that information as well—particularly if your income is seasonal or cyclical. If you don’t have a two-year history of employment, you can use a type of mortgage loan known as a bank statement loan, but they usually come with higher mortgage rates and are classified as a non-QM loan. 

Can You Refinance a House Without Proof of Income?

There may be situations where you need to refinance but don’t yet have a consistent, stable stream of work or provable income. Fortunately, there are options for refinancing your home without proof of income—these simply may cost you a higher interest rate. 

Talk to your mortgage lender and see if you qualify for: 

  • FHA Loan, USDA Loan, or VA Loan Streamline Refinance These options are available to current FHA, USDA, and VA mortgage borrowers, though some may still require proof of employment.
  • Non-qualified (non-QM) loans – This loan option, also known as a no-income verification loan, can come with significantly higher mortgage rates. However, there are several options depending on what income, assets, or banking verification you can provide. A bank statement loan is a type of non-QM loan, as mentioned previously. Be sure to research more about this type of loan and see if a no-income verification refinance is a viable option for you.

Self-Employed Mortgage Refinancing Options

Whether you’re seeking to refinance your home and have been self-employed for ten years or have just gone solo with your enterprise, you have options. Depending on your history and financial situation, you can provide proof of income, spread out the risk, or increase your loan cost. 

Refinancing possibilities include: 

  • Provide Proof of Income – Rather than verification of employment from a company, self-employed borrowers need a bit more paperwork to prove income. This often includes:
  • Past two years’  income tax returns for your business
  • 1099 forms from this time period
  • Bank statements for the past two years, both personal and business
  • A year-to-date profit and loss (P&L) statement that aligns with reported income. A P&L is usually acceptable when provided by the self-employed borrower, but some mortgage lenders may require completion by a licensed accountant or financial professional.
  • Enjoy Your FHA Loan, USDA Loan, or VA Loan Benefits – A streamlined refinance through one of these government-backed loans is a valuable tool to employ when refinancing your home. If you have this option, consider it strongly.
  • Bring a Co-Signer – If you’re buying with a partner or co-signer, your income won’t need to stand alone. With someone else to back you up, their income can be part of your total income qualification. 
  • Pay More – If you opt for a non-QM or “no-doc” loan, you’ll want to ensure you can afford the higher interest rate. While it might not be the best option for refinancing, it’s an available tool for those whose situations don’t meet the other requirements.

For any self-employed person seeking refinancing, however, it’s also important to know that there’s more than one way to tap into your home’s equity.

Leverage Your Home Equity Without Refinancing 

Working with traditional lenders on a refinance or home equity loan can require self-employed professionals to jump through many hoops. But if you’re your own boss and need financing options, refinancing isn’t the only way to go. Whether you’re looking to get a cash-out refinance for home improvements, paying off business debt, or something else, a sale-leaseback is a great alternative to refinancing.

A sale-leaseback helps homeowners convert their home equity directly without the hurdles and costs of a mortgage process. Some programs will work with homeowners regardless of income, credit score, or debt ratios—including those who’ve been left behind by big lenders. 

Key Takeaways

You’ve built up equity in your property, and it’s your right to convert that investment when you need it. If you’re ready to turn your home equity into cash flow without proving income, find out how our sale-leaseback program can help.

Sources: 

FHA Mortgage Source. FHA Loan Guidelines self-employed Buyers. https://www.fhamortgagesource.com/fha-loan-guidelines-self-employed-buyers/

The Mortgage Report. Can you refinance with no income verification in 2022? https://themortgagereports.com/20984/refinance-options-financial-setback-lose-income

Topics:
Cash Out Refinance
Mortgages
Refinancing
Self-Employed
Written by Tom Burchnell
Director of Product Marketing
Disclaimer

This article is published for educational and informational purposes only. This article is not offered as advice and should not be relied on as such. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process. EasyKnock is not a debt collector, a collection agency, nor a credit counseling service company.