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Refinancing if you are self-employed

Posted by  on Aug 10, 2011
 

Many homeowners have decided to take advantage of some of the best mortgage rates in history and refinance their mortgages. But getting a home refinance can be especially challenging if you or your spouse are self-employed. Use the following tips to improve the chance of getting approved for a home refinance if your income is irregular.

Review your credit report

Don't apply for a mortgage refinance without doing a few things first. Pull your credit report from all three major credit reporting agencies so you can scout out potential problems. Make sure all information is correct, including account balances, names of creditors, judgments, child support payments, etc. Don't forget to obtain your scores, which you'll have to pay to see.

Pay off credit card debt

It's a good idea to pay down credit card debt if you have a high debt-to-income ratio. Mortgage lenders consider your debt-to-income ratio to be a key piece of information when deciding whether to approve a mortgage refinance. Even if you have been making credit card payments on time each month, you could be denied a loan if you are viewed as too debt-laden.

Consider a cash-in refinance

If don't have a lot of credit card debt, consider using some of your savings (or an employee bonus) to bring cash to closing when refinancing. A mortgage lender may be more willing to approve refinancing if you pay down the principal at closing. A cash-in refinance would raise the amount of your home equity, and could actually help you qualify for a better refinance rate. Bringing cash to closing could also help if you are just slightly underwater on your mortgage loan.

Provide all documentation requested

Don't expect to refinance without being asked to provide documentation for your income. As a self-employed individual you will be required to provide tax returns for the last two years to show your income. If your spouse holds down a regular job, he or she will need to provide recent pay stubs. When shopping for a mortgage you also may be asked to provide the most recent bank statements and proof of other assets. If your company credit card or other accounts show up on your personal credit report, be prepared to prove it--so underwriters don't count the debt against you twice.

Try FHA

FHA lenders do require that you prove your income, and you have to buy mortgage insurance regardless of your equity position. But FHA lenders do allow higher debt-to-income ratios and allow compensating factors to be considered. For example, excellent credit, regular contributions to savings, and a conservative attitude tiward credit use can all work in your favor.

Compare mortgage rates

When you begin the refinance process start with your current mortgage lender. The lender is already familiar with your payment history and may be more willing to work with you as a self-employed person. But don't assume that your current lender is going to offer you the best mortgage rates. Only by shopping around to compare mortgage rates will you find the best deal.

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