Refinance with Self-Employed Income

[Amy Greger]

Trying to refinance cash-out on a duplex.  Excellent credit. Went through most of the process, and was shut down because we have self-employed income only.  "I thought you still had a job (W-2)"...  

What's the best way to refinance?  Are there lenders that'd consider conventional mortgage for self-employed borrowers?

[Albert Bui]

Originally posted by @Amy Greger:

@Chris Mason

They should have no problem approving us based on line 37 of 1040!  But they said self-employed income is unreliable even though we show consistent year-to-year income.  In 2015 we funded extra in the DB Plan, so the K-1 income dropped as a result.  Apparently they only consider W-2 income "reliable".  

 The Employer side of 401k matching, DB or Defined benefit plans, or SEP - self employed pension, and other employer contributions are counted as a cost of doing business to retain officers, directors, and talent. so while this may be viewed by you as your own money being contributed else where to invest for your retirement, on our end  it "counts," as an expense to your bottomline. This is probably why you mentioned your Line 37 or Adjusted gross income is lower because of it.

W2 income is not the only income that is reliable.

I will disagree with Chris that most self employed people "lie," persay but there are a lot more benefits available to self employed and for business owners that are legal deductions you're allowed to take. The downside of course whether you took them ethically and legally or if you took these deductions as a "lie," is that it will be deducted from your bottom line. Accounts I work with personally tend to say anything that is "necessary," and "ordinary," in the course of business can be characterized as a deduction. I would however recommend that you do some mortgage planning and figure out how your income and deductions play into your end of year income especially if you want to have a good idea of what can qualify for the next year since lenders will use your 2016 tax return for 2017 and so on.

Lenders are generally looking at cash flow so there are deductions that aren't actual losses like depreciation, amortization, depletion, business mileage and others that you may be able to add back  depending on how you file.