Can I Still Refinance If I’m Self Employed? I Have an Option Arm Mortgage and am Afriad of Rising Rates!?
February 12, 2011 in Mortgage Loan
I JUST started my own business and bought a new house and between the two I’m kinda broke. Started the business about 6 months ago and I’ve been moved in here now for about 12 weeks now. I keep hearing that the mortgage companies that made stated income loans are all going out of business. I got a smart choice mortgage and a line of credit thinking it would be good for the ups and downs of business, but I keep seeing on CNBC that ates are going up. Not feeling like it was too smart of a choice right now. Will I be OK? Can I refinance in a year or two or will all the mortgage companies that work with small business folks be gone by then? My credit scores were 623, 702, and 667 3 months ago
Yes, you can refinance, and you will need to provide your financial statements from your business. I recommend using a mortgage broker or a bank that your business account is at.
Being self-employed isn’t the big deal, it’s whether or not you are successful at being self-employed. If you can prove it using tax returns from the last 3 years then you don’t need stated income, you have proof. Your scores are low. Sub-prime lending is drying up. I suggest you go to your current mortgage lender and ask what they can do for you instead of going to a broker.
I wouldn’t spend any time worrying or thinking about it now, unless you want to try and move immediately into a fixed rate now. A better time to pose the question would have been before you did anything. Your rate is likely good for 1 or 2 years..at which time you can worry about whether it makes sense to refinance.
In the meantime focus on your business, it may not be a relevant question for you in 2 yrs.
Good luck
Ed
Your scores are reasonbly good. The biggest problem right now is with sub-prime lenders. Your employment could pose a problem unless: you are now self-employed in the business you have been working in for someone else. In other words have you taken the experience you gained over the last 10 years on your job and opened your own business? If so, you should not have any problems getting a loan due to your employment. If you were a auto mechanic and recently opened a floral shop you will have a problem. The smartest thing you or anyone can do in these situations is contact a professional and ask the questions. Do not stop at 1 person call several, ask your friends and family for referrals. This is not something you want to do alone on the internet, we are talking about 100,000′s of your dollars. Don’t you think it may be worth doing a little leg work? Do not be embarrassed or feel as though they think you are ignorant. You are not supposed to know everything about it, if you did you’d be a loan officer. I have been in this business for 20 years (mortgage loans) never once have I thought a client stupid for asking questions-only when they don’t ask.
I work for one of the largest mortgage companies on the planet. Get rid of your Option ARM ASAP. It is the absolute worst product on the market. Let me be brutal – only a fool or a desperate person would take such a loan. Contact a reputable lender, not a small timer and especially not a broker. Use a bank, S&L or large financial institution. Discuss your situation with them and let them tell you what can be done. Just because you are self-employed does not mean you cannot get a refi. There are many other financial factors involved.
Their must be a benefit to you……
George: Refinancing for the self employed has gotten significantly easier over the last few years, due primarily to ready availability of stated income and no income verification loans. These are loans for which there is little to no documentation required from you to substantiate your income for the purposes of qualifying for a refinance. Over the past few quarters, especially during the current quarter, credit guidelines for these types of mortgages have increased substantially. Don’t take this the wrong way, but while a credit score of 667 was definitely considered “good” by mortgage companies as recently as 3 months ago, 720 is the new good, at least as far as no income or stated income loans go. When you refinance in 2 years, you may be asked to document your income.
There are five major factors (and dozens of little ones) to keep in mind when a self employed person refinances:
1. Loan to Value (or LTV): This is the Balance of your loan divided by the market value of your property at the time you refinance. Loan to Value ratios below 80% ( let’s say you owe $ 400K on a $ 500K value house) have historically been significantly easier to refinance than LTVs over 80%, and require little to no mortgage insurance.
2. Credit Scores: A business owner’s credit tends to take a beating in the first several years of starting a business, primarily because a lot of new debt is incurred on credit cards, lines of credit, new personal loans and personally guaranteed business loans, and the hundreds of credit apps that you may file with suppliers, vendors and even some of your pickier customers. You should be trying to increase your credit scores to 720 or better, and thankfully you have a little while to do so. Smart use of personal credit cards (get them to increase your limits regularly for good payment history, and never use more than 50% of the limit on a single card) and timely monthly payments have the potential to significantly increase your credit scores.
3. Proof of Self Employment: Just like a normal wage-earning person would have to his employer verify employment for the past 2 years, the self employed person must be able to prove he’s been in business. This means more than just incorporation. Be prepared to provide a business license which has been issued in your name or the name of the business for 2 or more years, or in lieu of a business license a letter from your CPA saying that for the past two years he has been preparing your tax returns, that you are self employed, and preferably that you file Schedule C or the appropriate schedules for your filing category. If you are in business which requires a license in your area, you must be able to provide an explanation of why you don’t have one, and even that may not suffice.
4. Proof of Income: Bank Statements, whether personal or business, are generally unacceptable as proof of income for prime loans, and as you may have heard in the news, there’s not much “sub-prime” lending still going on. There’s an old saying that goes: “You can beat the Tax Man, or you can beat the Bank, but you can’t beat them both”. You may wish to write off tremendous amounts of expenses directly from the business and pay yourself a dollar, thereby beating the IRS, but in this case you would not be able to qualify for a prime loan unless your credit score was sufficiently high, and your LTV sufficiently low enough to state your income or ignore it entirely (“No Ratio” or “No Income Verification”). The normal, and most acceptable form of documentation of income, which will give you the best pricing, is tax returns. If the applicants are the only owners holding any equity in the business, you may be able to use your business tax returns to prove income, but this type of documentation is not accepted by every lender. If tax returns are not going to be an option, get those credit scores up!
5. Proof of Sufficient Assets: Most Industry experts who deal in the mortgage secondary market, where closed loans are bought and sold by banks and investors in mortgage backed securities believe that we are seeing the end of truly “stated” and “no doc” lending, and that at least over the next few years that applying for a mortgage will require borrowers to be able to verify either income or assets at the least. So if you state income, you should be able to prove that you have money in the bank which is commensurate with the income level you have stated and the monthly housing expenses you claim on your loan application. By this logic, a person stating they make $ 6,000 a month and have been doing so for 2 years, with total monthly expenses of $ 3000 a month, should have at a bare minimum $ 6000 to $ 9000 in the bank to pass a “reasonableness test”. By assets we generally mean liquid assets, cash in the bank, stocks, bonds, and to certain extent retirement accounts. Certain personal assets which can be appraised and are generally appreciative in value by nature, for example fine art, may be included provided a professional appraisal is conducted. In 18 months, 2 months before you refinance, plan on keeping your liquid assets as high as possible, be it savings or investments etc., until you close the refinance. This covers all of your bases. Business bank statements can generally be used to substantiate assets as well, but only if your CPA provides a letter stating that you have full access to 100% of those funds and that withdrawing them will cause no material harm to the business.
Recommended Course of Action: Make sure your business is properly licensed and that your CPA is doing your books and taxes from the very beginning. Keep your credit scores up, and try to improve them wherever possible by increasing your credit limits and paying down your balances. Never, no matter how tight things get, miss a mortgage payment, or pay more than 14 days late. Decide now how you are going to account for your income. Being able to document your income through tax returns is something you really should consider, whether it’s personal or, if you’re the only owners, then possibly through the business returns. Finally, contact a mortgage company who really specializes in refinancing the self employed about 2 months ahead of the time you want to refinance, so you can plan the process and be prepared with everything you need to get the job done properly. Don’t assume that your current lender or servicer will give you anywhere close to the best deal when you refinance, because the nature of the business is that they can make more money the second time around, and are more than likely to try it! My final tip? Hold on to the name of your title company and your appraiser, it may save you some time and money when it comes time to refinance again.
If you hadn’t just taken the loan out, my recommendation would be to refinance now into a program which is both Fixed and Flexible, such a 30 Year Fixed cash flow loan with minimum payment options, allowing you to lock in a low rate for 30 years while still preserving all of the cash flow, deferred interest, and negative amortization options of a pay option mortgage, just minus the ARM adjustments. The reason I say that is that there probably won’t be a better time than the present to refinance for a self-employed borrower for years, and while the steps I’ve outlined above are conservative and as accurate as we can be, no one can predict the future and what it holds for self employed borrowers seeking to refinance.
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yes you can still refinance, i suggest for you as your business going up and down to do refinance with 5 years power option arm that will help you a lot as first your rate will be fixed for 5 years also you will have 4 option to pay your mortgage payment in that way you don’t have to worry about your payment and if you need more info how that work i will be more than happy to explain it for you or i can refinance you. hope this is help.
First of all, don’t worry about your ARM going up unless you are getting close to the adjustment date. If you have a 3-year ARM and you just go it, you have 3 years to not worry. Make sure you understand the terms and dates of your ARM. If you don’t, contact your mortgage company immediately and get that information.
You probably won’t do better than your current ARM if you refinance, although fixed rates are pretty low right now. That said, if you are close to the adjustment date, contact a trusted mortgage professional immediately. They will help you analyze the best situation to save you money.
ARMS are not bad. They are useful tools and can save people a lot of money if used correctly. I can assure you, most financial professionals and investors always use ARMs. You just have understand how they work and be careful to know when they are going to adjust and by how much.
Finally, I want to address your question about stated mortgages. Recently, the rules for writing stated mortgages have tightened and regulations have increased. Some companies have run into trouble and gone out of business because of too many sub-prime loans that defaulted. That said, most companies that write stated mortgages ARE NOT going out of business. They just changed the rules on how they can write them. I work for Quicken Loans and we are far from going out of business. We are growing.
So, find out when your mortgage adjusts and plan to take action when appropriate. Get in touch with your mortgage company and make sure you are in the best possible situation. I wouldn’t worry too much. Make sure you make all your payments and keep your credit from dropping and you should have no problems refinancing when you need to.
Good luck.
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