Self-employed borrowers face a serious issue. Lenders need solid proof of income. But for many self-employed borrowers, their tax returns show very little income, or even a loss. How will you ever qualify for a mortgage, let alone a cash-out refinance if you don’t show income?
Fortunately, many alternative lenders offer bank statement cash-out refinance programs. These programs differ from the subprime loans from before the housing crisis. You still have to verify your income, but you can do so in an alternative way – with your bank statements.
Keep reading to learn how to qualify.
Provide a Decent History of Self-Employment
Remember that 2-year job history requirement for your purchase loan? Most lenders want that when you need a bank statement loan. They need to see a history of self-employment success. They want to know that you have what it takes to carry on with a successful business.
You can verify your self-employment with some of the following:
- Letter from your CPA certifying the date you started your business and that you are currently in business still
- Proof of your business license
- Proof of your business website
Perfect Your Credit Score
Just because subprime lenders write the bank statement loans doesn’t mean you can have bad credit. Lenders still need to reduce the risk of default. While you may find some lenders that accept credit scores as low as 500 – 550, you are more likely to find credit score requirements of 640 or higher.
Before you apply for a bank statement refinance, try fixing your credit score using any of the following:
- Make your payments on time
- Don’t overextend your credit cards
- Don’t open new credit
- Don’t close any existing credit accounts
- Clear all collections and judgments
- Make sure all accounts on your credit report belong to you
Decent Down Payment
The down payment requirement will vary by lender. Some want a 30% or higher down payment. Others will accept a lower down payment of 10% or even less. Typically, lenders look at the big picture when they decide how much you must put down on the home.
For example, if you have a low credit score, of say 600, a lender will want a higher down payment. On the other hand, if you have a 700+ credit score, you may get away with a lower down payment of 5% – 10%. It depends on the lender’s requirements too. We always recommend getting at least three quotes from three different lenders. This way you can compare the offers and decide which one works the best for you.
Proof of Income
All loans require some type of proof of income today, thanks to the housing crisis. In this case, you’ll use your bank statements. Lenders typically ask for 12 – 24 months of bank statements. Lenders look for consistent deposits that correlate with your income.
Lenders take an average of your income over the 12 or 24 months. If you only have personal accounts, lenders typically use 100% of the funds deposited. If you have a business account, you must prove sole ownership of the account in order for the lender to use 100% of the funds.
If you have any large deposits that make the lender wonder if it’s income, you may have to provide proof of its origination. This helps lenders get an accurate snapshot of your income and what you can afford.
In addition to your bank statements, lenders want to see accounting documents showing your business’ success. The average lender asks for a Profit & Loss Statement. They typically want a year-to-date statement that shows your income up until that point in time. This helps lenders see that you are on track to make the same amount of money they averaged using your bank accounts.
Keep in mind that you may have to shop around to find a lender that offers a bank statement cash-out refinance. Not all lenders offer it. Even if you do find lenders that offer it, they may have differing requirements. Before you apply, try to maximize your qualifying factors. Remember that asking for a bank statement loan makes you a slightly higher risk of default. Lenders want to see that you are well qualified for the loan by having other top-notch qualifying factors.