If you are a self-employed veteran, you have the same refinance options as a regularly employed veteran. The difference is in the documentation you may need to provide lenders. Self-employed borrowers typically pose a higher risk to lenders, which makes them require more/different documentation to ensure that you are a good risk.
Whether or not you’ve already used your VA home loan benefit will determine which refinance options you have.
Self-Employed Veterans With a VA Loan Already
If you already used your VA home loan benefit and you want to refinance, you may be eligible for the VA Interest Rate Reduction Refinance Loan, otherwise known as the streamline refinance. This loan program allows you to refinance with very little verification, even if you are self-employed.
The VA IRRRL program requires you to verify only the following:
- Your mortgage payment history – You should have made your last 12 mortgage payments on time. Some lends do allow up to one 30-day late payment during the last 12 months, but your mortgage must be current at the time of application.
- Proof that you benefit from the refinance – There must be a way that you benefit from the refinance. Typically, this means a lower payment or a better loan term, but lenders accept a variety of benefits.
Notice that the VA IRRRL doesn’t require you to verify your income, assets, credit score, or home value. The VA doesn’t require this. Now because the VA doesn’t underwrite the loan, you may find a lender that still wants to verify your income, especially if you are self-employed. You may need to shop around to find a different lender that doesn’t have overlays if this is the case and you are worried about verifying your income.
Self-Employed Veterans Without a VA Loan Already
If you are a veteran but you haven’t used your VA home loan benefit, you will need a VA cash-out refinance. Let’s say you took out an FHA loan when you bought the home but now you want to use your VA home loan benefit. You’ll need to fully document all aspects of your qualifications. This includes:
- Proving that you have at least a 620 credit score (actual requirements vary by lender)
- Proof that you have enough disposable income to meet the VA guidelines for your area and family size
- Proof that you have stable self-employment income
- Proof that you have the experience to succeed in your self-employment business
- Proof that your debt ratio doesn’t exceed 41%
In order to prove your self-employment income, you’ll need a few more documents than a regularly employed veteran would need. This includes:
- Tax returns for the last two years with all schedules to show your self-employment income
- Letter from your CPA confirming your self-employment
- Bank statements showing the receipt of your self-employment income
The lender needs to make sure beyond a reasonable doubt that you qualify for the loan. They typically look for a 2-year history owning a business. They also look to see what qualifications you have to succeed in the business. For example, did you work for someone in the industry prior to owning your own business? Did you go to school to learn about the industry? What special qualifications do you have to prove that you will succeed?
Because VA lenders can add their own requirements onto what the VA requires, you may find lenders with stricter requirements. Self-employed borrowers typically pose a higher risk of default, so it’s not unusual to see lenders require higher credit scores or lower debt ratios for self-employed veterans.
Any Other Loan Program
If you are a self-employed veteran, you don’t have to use the VA loan program. While it’s typically the most flexible and is the only loan that offers 100% financing, even for a cash-out loan, you can use any loan program.
A few of the other refinance programs available include:
- FHA loan
- Conventional loan
- Subprime loans
Typically, veterans that can’t get a VA refinance for one reason or another will turn to the subprime loans. While subprime loans have a negative connotation, they aren’t as bad as you think. Today lenders have to be much stricter with their guidelines, ensuring that you can afford the loan beyond a reasonable doubt. This means even self-employed veterans will have to verify that they can afford the loan the traditional way or with alternative proof of income, such as bank statements.
Self-employed veterans have many of the same refinance options as any other borrower. The key is to prove that you can afford the loan beyond a reasonable doubt. Lenders need to know that your income is stable and steady in order for them to approve your loan.