Is Refinancing Harder When You’re Self-Employed?

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Refinancing your home mortgage can lower your monthly payment, let you access your home's equity or swap an adjustable-rate mortgage for one with a fixed interest rate. But how does mortgage refinancing work when you're self-employed? Refinancing is still an option in this case, but it may require providing more documentation than you'd have to if you were an employee. Here's what you need to know about refinancing your mortgage when you are self-employed.

What Do Lenders Look for in Refinance Applications?

Mortgages are made based on personal, not business, income—but for self-employed people, the two are closely related. You are considered self-employed by lenders if you have an ownership interest of 25% or more in a business. In general, mortgage lenders weigh the following factors, whether you're self-employed or not:

  • Credit score: Your business credit score is not a factor in refinancing your mortgage, but your personal credit score is. A FICO® Score that's very good (740 to 799) or exceptional (800 to 850) will boost your odds of being approved.
  • Payment history: Lenders will check your credit report, hoping to see a history of making debt payments on time.
  • Debt-to-income (DTI) ratio: This figure reflects how much of your monthly income goes to pay debts. Your front-end DTI measures your monthly housing costs in relation to your gross monthly income; your back-end DTI measures all of your monthly debt payments in relation to your gross monthly income. Mortgage lenders consider both DTIs, and typically want to see a front-end DTI of 28% or less and a back-end DTI under 43%.
  • Credit utilization: Your credit utilization ratio measures the amount of revolving credit you are using compared with your total available credit. If your credit utilization ratio is 30% or more, it can negatively affect your credit scores. A high credit utilization ratio may suggest to lenders that you're having trouble paying your bills and using credit to get by.
  • Employment history: Lenders like to see financial stability. If you work for an employer, the lender will typically want to see you have worked at the same job for at least two years. If you're self-employed, they will want to see you have been in business for at least two years; they may allow exceptions, however.
  • Income: When you're self-employed, your income may fluctuate, which can make lenders nervous about your ability to pay back the loan. Because self-employed people often take lots of business tax deductions, their adjusted gross income (AGI) may be significantly less than their actual income. Both factors mean you'll have to work harder to prove you have adequate, reliable income.

Options for Mortgage Refinancing When You're Self-Employed

Most mortgage loans are resold to government-backed companies Fannie Mae and Freddie Mac. Loans that qualify for resale, called qualified mortgages, must meet strict criteria. For the self-employed, refinancing into a qualified mortgage may require providing:

  • Verification that your business exists (such as a business license)
  • Business and personal tax returns for the past two years
  • A year-to-date profit-and-loss and balance statement for your business
  • Your most recent business bank statements

If you don't have two years' worth of self-employed tax returns, or if your income has declined or is seasonal, you may want to investigate a non-qualified mortgage. These loans, which have looser criteria than qualified mortgages, are often marketed to self-employed people. Non-qualified mortgage lenders may verify your income using bank statements rather than tax returns or take liquid assets (such as investments) into account when assessing your ability to repay the loan.

If you have a Federal Housing Administration (FHA)-insured mortgage, consider the FHA's Streamline Refinancing option. Certain Streamline Refinancing options require no income or employment verification. You just need to have made at least six loan payments on your existing mortgage, be current with no late payments, have had the loan for 210 days, and show that refinancing will either reduce your monthly payment or shorten your loan term without increasing your payments by more than $50.

Finding the Right Refinancing Lender When You're Self-Employed

As you can see, finding the right mortgage when you're self-employed can be tricky. Working with a mortgage broker can help. Brokers work with a variety of lenders to match individuals to the best loan for their needs.

Because fees, points and closing costs vary from lender to lender, shopping around is key to finding the best refinancing option. Start with your current lender: They know your financial and repayment history and may be willing to work with you to retain your business, such as by reducing fees.

Keep in mind that different lenders may assess your financial situation differently, so even if one lender won't refinance your loan, another one might. For example, even if you've been self-employed for less than two years, some lenders will consider your previous experience and income in the same industry in deciding whether you're likely to sustain your income going forward. Lenders may also add some of your business deductions back into your AGI, raising your income and making it easier for you to qualify for a loan.

As long as you submit all your mortgage applications within a short period—14 to 45 days depending on the scoring model—multiple applications won't negatively affect your credit score. Aim to get offers from three to four lenders and then carefully compare mortgage fees, interest rates and monthly payment to calculate which offer best fits your refinancing goals.

Get Your Credit Ready to Refinance Your Mortgage

A good credit score goes a long way toward helping you refinance. Here's how to get yours in shape.

  • Review your credit report. Get a copy of your credit report and check it for accuracy. If you spot what you believe to be incorrect or fraudulent information, file a dispute with the credit reporting agencies right away. Since an outstanding dispute can make it harder to get approved for a mortgage, be sure to get any disputes on your credit report resolved before you apply.
  • Check your credit score. If necessary, work on improving your score before you apply to refinance your mortgage. You can help improve your credit score by reducing your credit utilization ratio, paying down debt and making all your payments on time.
  • Avoid applying for new credit. Don't apply for any credit cards or loans in the months before you try to refinance. Whenever you apply for new credit, it generates a hard inquiry into your credit history, which can temporarily lower your credit score. In addition, lenders may view applications for a new credit as a sign that you're having financial trouble and need credit to stay afloat.

What if Your Refinancing Application Is Denied?

If your mortgage refinancing application is denied, your lender must tell you the reason in writing. Most often, applications are denied because your credit score is too low, your debt-to-income ratio is too high, your income is insufficient or you don't have a strong employment history.

If the lender doesn't specify why your application was declined, follow up to find out. Knowing why you didn't get the loan can help you take action to remedy the situation, such as working to improve your credit score and increase your business income.