Self-employed mortgage applicants must prove stability of employment and income, usually going back two years.  This is a bit tougher than it is for regular salaried employees.

Traditionally, mortgage lenders have required two years federal income tax returns in securing a mortgage for purchasing or refinancing real estate.  There’s been changes to the way mortgage lenders underwrite mortgage loans.

Fortunately, there is a way to use just one year of tax returns to qualify for a mortgage.  This can help newer business owners, as well as those who experienced a down year in the past.

Whether you are looking to buy a home or refinance one, you may be able to qualify by showing only your most recent year of income.  Check out this article by The Mortgage Report’s Adam Lesner for more.

Getting Approved As A Self-Employed Applicant

Generally, a self-employed borrower is any individual who has 25% or greater ownership interest in a business.

According to conventional mortgage guidelines published by Fannie Mae, underwriters consider the following factors to approve a self-employed borrower.

• The stability of the borrower’s income
• The location and nature of the borrower’s business
• The demand for the product or service
• The financial strength of the business
• The future outlook of the business

Two points stand out here when getting approved as a business owner: stability and consistency.

The way underwriters measure stability is by looking at length of history in that business specifically, and in that field.

They typically want to see a two-year history in the respective industry. This is where you may be granted an exception if you haven’t been self-employed the whole two years in that line of work.

Ask The Lender To Use Different Approval Software

In some cases, the underwriter won’t ask you to provide a full two years’ worth of tax returns.

Most applicants’ files are run through computerized underwriting systems, then verified by real person. The underwriting software, in some cases, will ask for the most recent year of tax returns only.

The one-year requirement typically comes from “Loan Prospector,” which is Freddie Mac’s loan approval software. Fannie Mae’s version of the software is less likely to give you a one-year requirement. Most lenders can approve loans via Freddie Mac or Fannie Mae.

If you have been self-employed less than two years, ask your lender to try running your scenario through Loan Prospector. There’s a chance this system will require you to document less self-employment than would another system.

If you receive the reduced, one-year requirement, it’s important to understand that your tax return must reflect a full year of self-employment income.

For example, if you became self-employed in April 2017, that year’s tax returns are not going to reflect a full year.  If you started your business in November 2016, then your 2017 tax returns will demonstrate a full year of experience running your business.

Give your me a call to find out more – as there are multiple alternatives that we can examine!

If you bought a house with a down payment of less than 20%, your lender required you to buy mortgage insurance. The same goes if you refinanced with less than 20% equity.

Private mortgage insurance is expensive, and you can remove it after you have met some conditions.

How to get rid of PMI

To remove PMI, or private mortgage insurance, you must have at least 20% equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80% of the home’s original appraised value.

The process to do so is straightforward.  Get an estimate of value from a local real estate agent or loan officer.  Online home valuation websites can be inaccurate, so be careful with those.

See if you have around 20% equity based on your home’s estimated value.  Be sure to add closing costs onto your existing loan balance if you do not wish to pay them out of pocket.

Then, reach out to your lender and begin the refinance process!

Refinancing to get out of PMI

When mortgage rates are near record lows, as they are now, refinancing can allow you not only to get rid of PMI, but you can reduce your monthly interest payments. It’s a double-whammy of savings.

The refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. Let’s say you bought your house 3 years ago for $100,000, and you borrowed $90,000. That means you have a loan-to-value ratio of 90%, and you pay for PMI.

Three years later, you’ve made all your payments and you have chipped away at the loan balance. Now you owe $85,000. And your home’s value has gone up — now it can be appraised at $112,000. Its value has grown 4% a year.

At this point, you owe $85,000 on a $112,000 house. This means you owe 76% of the home’s value — well under the 80% loan to value that triggers the need for mortgage insurance. Under these circumstances, you can refinance into a new loan without having to pay for PMI.

Here’s a great piece from Craig Berry at the Mortgage Reports for those who have FHA loans and are paying mortgage insurance (MIP). He outlines the benefits of the FHA loan – and examines why right now is a great time to move to a conventional loan.

Now is the time

With rates near historic lows and home values rising consistently, now is a fantastic time to look at refinancing away that PMI.  I’d be happy to sit down with you and talk about alternatives and programs that could fit you needs!

The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc.