As more and more Americans move past the crisis stage of the COVID-19 pandemic, many homeowners want to refinance to take advantage of current low-interest rates that may rise during 2021 or beyond. But if you’re a self-employed borrower who weathered the pandemic’s financial shocks, you may have a few extra challenges in order to refinance. Here are five things you can do to help improve your qualifications.
1. Be Realistic About Timing
When rates are low, many homeowners are naturally keen to take advantage of these by refinancing. But that fear of missing out shouldn’t push you into anything if it’s not the right time.
If you suffered financial setbacks because your business had to shut down or in-person sales and services were curtailed, be realistic about your ability to refinance at the moment. You may need to wait a few months and forgo the lowest rates to have more success. When your business income develops a longer track record in the post-pandemic environment, you’ll be that much more ready to go.
2. Find Out What Income Is Included
Self-employment income can be difficult to use as a source for loan approval, so start by determining exactly what you can (or must) count and what you may choose to leave out. Recent Paycheck Protection Program (PPP) loans made available to small businesses, for instance, may not count as a business asset for loan purposes due to being a one-time income source.
And if your side gig was seriously impacted during the pandemic, it may even be better to leave it off your application and use only more stable sources of income instead. Due to the difficulty documenting non-employee income and the rules that govern its use, the tradeoff could be to your benefit.
3. Gather Additional Documentation
Self-employed borrowers already face obstacles involving documentation that traditional earners don’t. If possible, most business owners prove their income through financial statements (particularly the profit-and-loss statement) for the prior two years. You may also be able to show bank statements. And don’t forget to include your prior two years of tax returns.
Due to sporadic shutdowns during the pandemic, you may be further asked to show proof that your business remains an ongoing concern or that pandemic strains have abated. For instance, you might get a signed statement from an accountant who works with your business. The sooner you find out what the current documentation should be, the sooner you can round it up.
4. Reconsider Your Income Tax Strategy
Most Americans reduce their income tax burden by claiming all possible credits and using any allowed exceptions for reporting taxable income. But this may impact your ability to refinance because your business income could appear lower than what’s required for qualification.
While you shouldn’t do anything unscrupulous with your tax return, self-employed taxpayers may have options to make their income more loan-friendly. For instance, you might boost current taxable income by taking depreciation for a large asset on an annual basis rather than claiming all depreciation at once. Remember, you can amend past tax returns if it will help your loan situation.
5. Work with a Finance Professional
Finally, talk with an accountant about your self-employment finances before you start shopping for a new mortgage loan. They can help you identify weak areas in your books, realistically assess how your business appears to lenders, and prepare financial statements for lenders.
If you have self-employment income, the time to start working toward a successful refinance is now. Even if you end up waiting until your business finances settle down, you will have a head start on the sometimes lengthy approval process.
Dominion Capital Mortgage Inc. can help. Call today to speak with a member of our lending team and learn how you can have the best experience possible refinancing no matter how your self-employment income may have been affected by the pandemic.