Refinancing Home Loan for Self-employed
Refinancing a home loan, simply put changing a home loan, is tedious for most people, even more so for the self-employed. After the arduous process of getting a mortgage as a self-employed borrower, it now may be time for you to consider refinancing your home loan. The mortgage market is continually changing, and the loan you took a few years ago may not be suitable for you now.
A home loan health check-up will help you evaluate and compare your current mortgage features and rates with others available in the market. If your existing mortgage no longer matches your need, then the next best step may be to refinance a home loan. Refinancing your home loan can help you better manage your monthly payments and reduce the costs altogether. However, home loan refinancing is quite difficult for self-employed individuals, as mentioned earlier.
Difficult, Yes. Impossible, No.
Luckily, with adequate preparation and thorough record-keeping, home loan refinancing is possible for self-employed and small business owners. Here’s what you need to know.
Understand Why You Want to Refinance
Before you refinance a home loan, you must first understand why you want to refinance and what it entails. Yes, it presents the potential for significant savings, but you must evaluate whether the incentives of a new mortgage are worth the costs and hassle of changing home loans. You must also consider all the possible fees (such as exit, break, and settlement) and new loan setup fees on top of any ongoing expenses. Some common reasons for self-employed individuals or small business owners to refinance home loans include:
- A lower interest rate
- Consolidating your debts
- Changing your home loan type
- Shorten your loan term
What Lenders Look For
After understanding why you want to refinance a home loan, if you decide to go through with refinancing, then you’ll be required to provide additional documentation as a self-employed borrower than a typical salaried borrower. There’s no denying that banks and other lenders view your application differently if you’re self-employed or a small business owner. You are recognized as self-employed if you have an ownership interest of 25% or more in a business.
The struggle for self-employed individuals occurs because lenders want to make sure that they will be repaid. When you are a typical job holder, lenders only look at your personal financial position when evaluating your application. But if you are self-employed or a small business owner, lenders also take your business’s financial position into account. Banks and other lenders may consider your income “unpredictable” and thus see you as a high-risk borrower who is more inclined to default on repayments. Therefore, you must prepare yourself to jump through extra hoops to show your lenders that you are a safe investment for them.
In general, most lenders look at the following factors:
Your personal credit score weighs a little more than your business credit score when it comes to refinancing your home loan as a self-employed borrower. So, make sure it is above 750 to increase your chances of getting qualified.
Lenders will review your credit report to check if your debt repayments were on time or not in the past.
Debt-to-Income (DTI) ratio
This factor displays how much of your monthly income is spent on paying debts. So the lower your DTI, the better the chance for you to get qualified.
Above all else, lenders are looking for financial stability. If you’re self-employed, they want to see at least an uninterrupted two-year history of being in business and income records. If you are unable to provide that, you must demonstrate your self-employed activity of at least the past 12 months together with previous employment.
You must be able to demonstrate consistent income, substantial growth in business, and a trend of increased earning overtime. Any fluctuations in your income may make the lenders skeptical about your ability to repay the loan. Furthermore, business tax deductions can leave your adjusted gross income (AGI) significantly lower than your actual income. Due to this, you’ll have to put more effort into showing that you have adequate, consistent income.
Be prepared to provide the most recent copies of business financial statements, personal and business tax returns, ATO notices of assessment, statements for the mortgage you want to refinance, and statements for savings, credit card, and other loans you own with other financial institutions.
Finding the Right Lender to Refinance Home Loan
As evidenced, refinancing your home loan when you are self-employed is quite tricky. Having an experienced mortgage broker by your side can help immensely. Mortgage brokers work with various lenders and have a deep understanding and knowledge of the real estate market. They leverage this intelligence to match individuals with the best loan as per their needs.
It is also essential to understand that different lenders evaluate your financial situation differently, and if one lender rejects your application, another lender might refinance your home loan. It is always a good idea to get offers from at least three or four lenders. You can then compare fees, interest rates, closing costs, and monthly payments to carefully select the best one that meets your refinancing goals.
If you’re self-employed and looking to refinance your home loan, please speak to us. Book an appointment and discuss your personal situation with one of our experienced Nepali mortgage brokers.