ay your tax bill

If the amount on line 76 of your tax return, "Amount You Owe," exceeds the GDP of a small country, don't despair: The IRS will not unleash its attack dogs on you as long as you stay in contact and take the proper steps to pay your tax bill.
What are the steps you can take to pay the Internal Revenue Service (IRS) if you don't just have the cash sitting in your savings account? The best answer for some taxpayers in this situation may surprise you: Take out a home equity loan or line of credit (HELOC).

First things first

Before weighing your options, however, be sure to file your tax return on time, even if you don't know how you'll pay your debt in full. The IRS will send you a bill or notice for the balance due. Extra penalties kick in if you fail to file your tax return on time.

Traditional tax payment options

The IRS does give you several options for taking care of tax obligations. They are:
The short extension: If you cannot pay the total immediately, the IRS allows you up to 120 extra days to pay in full. No fee is charged for choosing this payment arrangement, but interest accrues

• until the bill is paid. Simply call the IRS at 800-829-1040 to ask for this option--you will save on the fees associated with an IRS payment plan.
• The six-month extension due to hardship: If the IRS approves your Form 1127 request (Application for Extension of Time for Payment of Tax Due to Undue Hardship), you can get up to six months to pay the tax you owe. In your application, you must include information regarding your hardship and why you can't pay your taxes along with details on your assets, liabilities, income and expenses.
• Installment plans: You can request an installment payment plan for your tax debt. You can propose a monthly payment amount and "self-qualify" by applying online when you have a balance of $25,000 or less. If you owe more than $25,000, you can still apply for a monthly installment plan, but you can't go the online route; instead, file IRS Forms 9465 and 433F.
  
  Paying by monthly installments will cost you, though. First, there's a setup fee of up to $105. Then there's floating interest of 3.43 percent as of January 2011--compounded daily--and finally a penalty of 0.25 percent per month that you carry a balance under an installment plan. You could be looking at a total interest rate higher than 6 percent, and that's assuming short-term interest rates don't increase.
• Credit card payment: You can also use a credit card to pay taxes owed, but you'll have to pay a "convenience fee" for the privilege, in addition to credit card interest. The IRS will take payments from Visa, MasterCard, Discover or American Express (up to your credit limit). Depending on your credit card's current interest rates, this could be a very expensive way to clear your tax debt.

Paying with a home equity mortgage loan

A better solution may be the one suggested by IRS Topic 202: "You should consider financing the full payment of your tax liability through loans, such as a home equity loan from a financial institution."
Using your home's equity may be the best way to finance your tax obligations, and it could be your only option if you owe more than $25,000.
The fees for setting up a home equity loan or a HELOC are generally minimal if anything. With good credit and adequate equity, you can find HELOCs at less than 4 percent and fixed home equity mortgage interest rates at less than 6 percent. You may also be able to get lower payments than the IRS is willing to offer. Talk to a mortgage lender to see what terms you may be able to get.

Don't put your head in the sand

Whichever option you choose, don't ignore the problem. Snubbing the IRS is likely to trigger the filing of a lien against your home--a public record that can trash your credit. You will not be able to refinance your home loan, sell your property or get any sort of government mortgage without first clearing this obligation. It's far less expensive to take care of your tax problem now by using your home equity than to ignore it.

How your home equity can help settles DEBT?

Are your credit card bills keeping you up at night? If you are a homeowner with some equity, a home equity loan to consolidate your debt could be a savvy move to get you on firm financial footing again.
When you consolidate your debt via your home equity, you take out a home equity loan to get a lump sum of cash. You can use the cash to pay off your consumer debts, so the home equity loan--often referred to as a second mortgage--effectively replaces your various consumer loans.

However, consolidating your debt with your home equity is no silver bullet. It will not magically make your debt disappear, nor will it put you in a better financial position if you have bad spending habits that you don't get under control.

 4 reasons to use home equity for debt consolidation

Here is what debt consolidation with home equity financing can do for you:

• Make things simple. You will be replacing several monthly payments with one, making repayment easier to manage and late fees a thing of the past.
• Slow the growth of existing debt. Interest rates on second mortgages are typically far lower than consumer credit rates, since your mortgage is secured by your home as collateral. A lower interest rate means your existing balance won't be growing as quickly.
• Reduce monthly payments. Whether through a lower interest rate or a longer repayment period, you can lower what you pay each month toward your consumer debt. (Debt consolidation will not necessarily reduce the interest paid over the lifetime of the loan, however. In fact, it is important to note that debt consolidation can cost you as much or more in total repayment costs, particularly if you stretch out the repayment period.)
• Allow you to deduct more from your taxes. Mortgage loan interest payments are tax deductible, but consumer debt interest payments are not. Consolidation with a home equity loan can reduce your federal income tax through an interest-paid deduction on Schedule A.

Example: home equity loan vs. credit card debt
Let us say you have $25,000 in credit card debt at 18 percent interest, and you are currently paying $400 a month on that debt. A credit card payoff calculator shows that it would take over 15 years to pay off that debt. In the course of repayment, you'd pay more than $49,000 in interest.
If instead that $25,000 were owed on a home equity loan at 8 percent for 15 years, a mortgage calculator shows that your monthly payment drops to $239, and the total interest paid over the 15 years would drop to nearly $18,000.
If you needed to reduce your monthly payments even further, you could choose a home equity loan with a 30-year repayment period. Your monthly payments on the debt would fall to $183 per month, but the longer payback period means your interest payments increase to over $41,000 (almost as much as the total interest paid on the credit card debt at 18 percent over 15 years).
To become debt free the fastest, you could lower your interest rate with the home equity loan and keep paying the original $400 monthly payment. It would take just six years and 10 months to pay off your debt.
Avoiding the debt consolidation trap
Some advertisements make it seem so easy to fix your credit problems by consolidating debts with a home equity loan. But experts estimate the failure rate for such programs at an astonishing 66 percent to 80 percent.
Why?
Even the best home equity loan in the world will not tackle what got you into debt in the first place. Successful debt consolidation requires you to change your spending behaviors. Consolidation makes your debt easier to pay off, as long as you stop outspending your income.
If spendthrift ways are at the root of your debt, try the following strategies as you consolidate with a home equity loan:

• Limit your credit card use. Cancel your cards if you can't stop overspending, or keep only one for emergencies and have someone you trust hang onto it for you.
• Get professional help. Find a reputable credit counseling service which can help you learn to budget and become accountable for your spending choices. Avoid any agency that wants to put you into a debt management plan (you do not need it if you are doing it yourself with the home equity loan) or push you into debt settlement, especially if they want a large sum of debt repayment money from you upfront. What you are looking for here is free or low-cost education and counseling.
• Set up automatic payments. To reduce temptation, automate as many of your bills as possible. Arrange your checking account so that your first and second mortgage are paid automatically each month. Also, set up direct deposit and an automatic transfer of money to savings as well.

When a home equity loan is not an option
Not everyone has enough equity in their home or good enough credit to qualify for a home equity loan. In that case, try these solutions:

• Call your creditors. Many creditors will lower your interest rate in exchange for you freezing your accounts and not using them. Then set up automatic monthly payments from your checking account. Redirect any extra funds toward the account with the highest interest rate until it is paid off. Then, tackle the next highest, and so on.
• Enter a debt management plan. A debt management plan (DMP) from a credit counselor might be a good solution for you. Before signing up, understand how much of your monthly payment will go to your creditors, and get in writing how long it will take for you to become debt free.
• Weigh the bankruptcy option. If your debts cannot be paid through a DMP in five years or less, consider talking to a bankruptcy attorney. A Chapter 13 plan is like a DMP, except it is the bankruptcy court that has the authority to lower your payment to a manageable level. In five years, your debt is discharged even if you could not pay it all off.

Getting a home equity loan in an impossible market

Today, many mortgage lenders don't even bother to offer home equity loans (second mortgages). Too many holders of second liens got burned when homes lost value and the homeowners walked away, or when folks lost jobs and the first lien holder foreclosed.
Mortgage lenders that didn't go belly-up have retrenched, many offering only conforming first mortgages or jacking up the qualifications for second mortgages.

Home equity loans: The good old days
One national lender's 2007 home equity mortgage guidelines reads like some fantastic fiction today:
The minimum credit score for a $50,000 loan was 620, and with a score of 740, you could get a loan of up to $300,000 and 100 percent of your home's value. You didn't need to prove your income and could even take 80 percent home equity lines of credit against investment properties.
Needless to say, no lender is giving that kind of deal anymore. There are three main obstacles to home equity loan availability these days.
Obstacle No. 1: Evaporation of home equity
The biggest reason for the contraction in home equity financing is the contraction in home equity. A CoreLogic report released March 8, 2011, reports that nationwide, only 54 percent of homeowners with mortgages have at least 20 percent equity--the bare minimum needed to accomplish any sort of home equity borrowing.
In fact, according to the report, nearly one in four mortgage borrowers in the U.S. have negative equity.
However, the pain is not equally distributed. Five states have roughly a third or more borrowers underwater: Nevada (65 percent), Arizona (51 percent), Florida (47 percent), Michigan (36 percent), and California (32 percent).
Obstacle No. 2: Stricter program and mortgage underwriting guidelines
Even if you're among the lucky 54 percent with the bare minimum home equity for a second mortgage, that might not be enough. Home equity lenders don't lend up to 100 percent of your home's value the way they used to. Many large banks top out at 70 percent.
In addition, a search of mortgage lenders' underwriting guidelines turns up a slew of requirements that did not exist four years ago. For example:

• Contingent liabilities are now being taken into account (liabilities you're not obligated to pay now but might be later, such as loans on which you are a co-signer). Underwriters today may add those potential payments in when determining your debt-to-income ratios, because so many co-signers today are being forced to make payments that primary borrowers have stopped making.
• Minimum credit scores have been ratcheted up from 620 to 660, to 720 to 760.
• Home equity lenders are demanding more evidence of job stability. Requirements for salaried employees to have a couple of years' tenure with their current employer are popping up. In the past, you only had to have been in the same profession for two years.

Obstacle No. 3: It's the economy
Credit histories in America have declined as unemployment takes its toll.
Even those borrowers who may have found new jobs may not have been at those jobs long enough to qualify.
Maximizing your chances for a home equity loan
Despite the grim outlook, there are willing and able home equity lenders out there.
Home equity loans are not the standard products of Fannie Mae, Freddie Mac and the FHA, so mortgage guidelines vary widely. Here are some tips to increase your chances of getting a home equity loan:

• Play the numbers. Contact many lenders to check their requirements as well as their home equity loan rates.
• Think small. Credit unions and smaller local banks are often willing to lend at higher loan-to-value ratios than large, national lenders.

Oftentimes, another mortgage product may accomplish what a home equity loan would:

• Consider FHA cash-out refinancing. The FHA allows you to pay off your current mortgage and take additional cash out, up to 85 percent of your home's value.
• Build in renovations. If you need cash for home improvements and have little or no equity, try FHA Title 1 or 203(k) rehab loans. The right sort of improvements may even increase your home's equity.
• Look into a reverse mortgage. If you're over 62, consider a reverse mortgage which comes with no credit or income standards.

Mortgage lending is a cyclical business. As the economy recovers, mortgage lenders will likely loosen up on requirements and make it easier to access the equity in your home.

Refinance a mortgage

There are two primary reasons to refinance a mortgage: to get more desirable rate and terms, or to extract cash from the home’s equity.

Rate-and-term refinancing pays off one loan with the proceeds from the new loan, using the same property as collateral.
This type of loan allows you to take advantage of lower interest rates or shorten the term of your mortgage to build equity faster.
Rate-and-term refinancing refers to myriad strategies, including switching from an ARM to a fixed or vice versa.

For example, if you have an ARM that is set to adjust upward in a few months, you can refinance into a fixed-rate mortgage.
Or if you have a fixed-rate loan and you know you’ll move in two or three years, you could refinance into a lower-rate 3/1 hybrid ARM.
Cash-out refinancing leaves you with additional cash above the amount needed to pay off your existing mortgage, closing costs, points and any mortgage liens. You may use the additional cash for any purpose.

You can easily calculate the equity in your home.
For example, say you bought your house for $150,000 a few years ago and borrowed $120,000.
Now the house has an appraised value of $250,000 and you owe $110,000.

With a cash-out refinance, you could get a mortgage for $150,000. You would pay off the $110,000 you owe and pocket the $40,000 difference, minus closing costs.

How to refinance when your home is listed for sale

With the ongoing housing crisis, it's an increasingly common scenario: family tries to sell house, family can't sell house, family decides to keep house. But what if the family would like to refinance the house that's still on the market?
Is that possible?

A home sale listing doesn't have to kill a refinance, but it can make it much harder. From the mortgage lender's perspective, you have some convincing to do.

Why a home sale listing can derail your refinance

When homeowners can't sell a primary residence, they often try to refinance and then rent them out while they themselves find another home. So when mortgage lenders see your refinance application and your plans to sell, they are leery that you'll do exactly that.
If mortgage lenders sell a mortgage on the secondary market and the mortgage goes into default or gets paid off in just a couple of months, they may be forced to buy it back.
Bottom line: If you're refinancing a home listed for sale, you need to show the mortgage lender you don't actually want to sell anymore.

Don't try flying in under the radar

Don't try refinancing your home as a primary residence if you are really going to keep marketing it.
If you are working with a Realtor who listed your home sale on a Multiple Listing Service (MLS), the refinance mortgage lender will find out.
If your selling efforts only involved sticking a "for sale by owner" sign on your front yard, by all means, toss the sign and proceed with your refinance. Similarly, if you worked with an agent who did not use the local MLS, you can probably cancel the listing agreement, lose the sign and refinance to your heart's content.
Mortgage lenders audit their files, and you could be charged with fraud if your home sells right after you refi or if you end up defaulting and it turns out you've turned it into a rental property.

Guidelines for Fannie, Freddie and FHA refinancing

Fannie Mae and Freddie Mac only require that you have your home off the market when you apply for your mortgage refinance. It can be off for one day and that's good enough for them.
However, your lender will probably care.
The Federal Housing Administration (FHA) takes no official position regarding homes listed for sale--so again, what the individual lender wants is far more important. Your FHA documents do require, however, that you sign off on your intention to live in the home as a primary residence for at least a year.
When you apply for a refinance, FHA underwriters are charged with making sure that you in fact intend to live in the home.

How to successfully refinance in this situation

Follow these steps to increase the chances that your refinance application will go through:
1. Cancel your listing. If your home is listed with an agent and on the MLS, you want to cancel your listing agreement, in writing. The letter to your agent should indicate that you wish to terminate your listing agreement, that you have decided not to sell your home and that you plan to continue living in it. Make multiple copies and get original signatures on all of them.
2. Write a letter to the lender. Draft a letter of intent stating that you have pulled your home off the market and that you plan to continue living in it as your primary residence. Some mortgage lenders may be more willing to refinance your mortgage if you accept a prepayment penalty with your new loan.
3. Talk to multiple lenders. Ask your mortgage lender how long the home needs to be off the MLS. Mortgage lenders vary a great deal in this requirement. Some just want it off the MLS for a day, but others may want to see your home off the market for six to 12 months. When shopping for your refinance, do more than compare current mortgage rates and fees; ask loan officers how a home listed for sale will be treated when refinancing.
With the right documentation and steps, you should find that refinancing is possible, even if your home was recently listed for sale.

A kinder way to refinance your mortgage

There's a ton of negative press surrounding the nation's banks these days. Whether it's the bailouts, the robo-signings, unjust foreclosures, or just the lack of a quality-customer experience, many consumers have grown tired and frustrated dealing with their banks.
Especially if you have tried unsuccessfully to refinance your mortgage with a bank, perhaps it's time that you considered taking your business elsewhere. Maybe it's time you thought about refinancing through a credit union.

While most banks have restricted their lending and tightened their credit qualifications in the wake of the housing bust, credit union have maintained consistent underwriting guidelines through housing boom and bust.
While only a small portion of credit unions offer mortgages (and they're mostly plain-vanilla products at that), they offer competitive mortgage rates and they're known for their top-notch customer service. So while researching a refinance with a credit union may take some added effort, the positive experience could make it all worthwhile in the end.
Credit unions are by the people for the people
Credit unions are non-profit organizations, owned by their members (you the consumer). Unlike banks, they are run by non-paid board members, they don't have monstrous marketing budgets, highly-paid CEOs and they don't participate in risky lending or bank takeovers.
A better customer experience
Credit unions are extremely local; they know their communities and understand how to better serve them.
Small credit unions may not have all of the resources of big banks, but they do direct the resources they have to benefit their local members. That means offering USDA mortgages in rural locales or VA mortgages for local military members.
Bob Dorsa, president of the American Credit Union Mortgage Association, says the local focus "means that the deals go a lot smoother than with big banks."
Loan officer David Halter, of Maps Credit Union in Oregon, says that membership indeed has its privileges. He says that his organization has "the ability to make common-sense exceptions," and that "longtime members with a proven track record would be more likely to get an exception.'
Better customer service
Credit unions only sell about half of the loans they make, and according to Dorsa, about two-thirds to three-quarters of credit unions retain the servicing even when the loan changes hands.
This way, borrowers don't have to deal with servicers that did not sell, underwrite and fund the mortgage to begin with. Credit unions have much lower default rates than other lenders, probably because of the relationships and loyalty that they enjoy with their members.
According to the Credit Union National Association (CUNA), with a loan growth rate (all loans) of 4.3 percent over the past five years, credit unions' loan delinquency rate was only 1.76 percent [in 2009], compared with 5.17 percent for banks.
Finally, because credit unions operate for the benefit of their members, you are more likely to get solid advice about your refinance, even when your interest conflicts with the institution's.
Comparing mortgage quotes
Comparing refinance mortgage rates among credit unions involves a little extra work.
Once you have found the credit union(s) available to you--the National Credit Union Administration (NCUA) has a credit union finder on its website--make sure they offer mortgages.
"Of the 7,000 or so credit unions in business today, only about 1,000 of them are viable residential mortgage lenders," says Dorsa.
Mortgage rates may be a little higher
According to data compiled by the NCUA, credit unions offered better mortgage rates on 1-year adjustable-rate mortgages and 5/1 hybrid ARMs, while banks offered better rates on 30- and 15-year fixed-rate mortgages.
However, those figures include the portfolio loans that credit unions own. According to Halter, "Interest rates for credit union portfolio loans may be slightly higher," while rates for conforming mortgages are in line with the market. That would increase the average rate charged for all credit union mortgages. Credit unions also excel at home equity loans, supplying them at rates substantially below bank rates.
Credit unions: An old-fashioned experience
Not all credit unions have retained their old-fashioned quaintness--some have begun offering an array of mortgage products and services. Others have joined together to form credit union service organizations that function as loan brokers for their members. The actual lender in that case may be a for-profit company.
Smaller credit unions may not have all of the online capabilities and resources of big banks, but for people who want to get a cheap refinance and be treated like, well, people, credit unions may offer the best of all worlds.

You are qualified and you can be approved

For all homeowners with mortgages, the average mortgage rate at 5.3 percent. It's no wonder that refinance volume is soaring.

Refinance requests accounted for four out of every five loan applications last week, according to the Mortgage Bankers Association, and volume remains heavy nationwide.
However, there are plenty of homeowners still sitting on sidelines, scared into thinking they won't qualify for today's mortgage rates. As a result, these homeowners never apply for one to find out for certain.
As an active loan officer, let me be the first to say, it's not as hard or difficult to be approved for a mortgage as you may have heard. Mortgage approvals are still about the same three things:

1. Income
2. Equity
3. Credit

And you can't get approved unless you apply.

Income: Prove what you earn
For today's mortgage applicants, the key element is proving strong income.
Income, of course, is relative. In order to get approved for a home loan, your verified monthly income should be slightly more than double your recurring monthly obligations.
If you're a salaried employee, calculating monthly income is typically simple. Take your annual salary and divide it by 12.
For those of you who are self-employed or for those whom bonuses and/or commissions exceed one-quarter of your annual income, verifying income requires tax returns.
This is one instance where having a good accountant can be costly.
If your tax returns incorporate a large number of write-offs and/or write-downs, your adjusted gross income may not reflect your true earnings power and your lender may decline your application.

Equity: Have ownership in your home
"Fear of no equity" is another reason why many homeowners avoid the mortgage application process. And that shouldn't be.
For one, there are loads of programs for homeowners who have lost varying degrees of home equity. Even if you're underwater, there may be a program for you. You can't know unless you talk to your lender.
And for homeowners backed by the FHA, lost equity is a moot point.
The FHA Streamline Refinance ignores home equity completely; you could be 100 percent underwater and it wouldn't matter. So long as you've been paying your mortgage as agreed, you'll likely be streamline-eligible.
Note: Not all lenders offer "underwater mortgages." So, if your first refinance application is with a bank that can't help you, you should make more phone calls to other banks.
You need to know your options.

Credit: Have a history of paying your bills
Lastly, your credit matters.
The standard "bottom line" for credit scores this season is a 640 median score from the major three credit bureaus. This means that you can have one low score and one high score--it's the middle score that matters.
There are some instances where credit scores as low as 600 are acceptable, but mortgage rates are often higher for those borrowers.
If you pay your bills on time and have a limited history of collections and charge-offs, expect your credit score to be in range for a refinance. You won't know your score, however, until you ask your lender.

Don't sit on the sidelines. Get in the game
If your mortgage rate is north of 5 percent--no matter what--spend just 5 minutes on the phone with your lender. Submit an application and get a rate quote. If you have the income, equity and credit to qualify, weigh your options and act decisively.
Mortgage rates are low, but they rarely stay this way. The refi boom will end someday. Make sure you were a part of it.

5 dumb refinance mistakes

When refinancing a mortgage, smart people can do stupid things. But smart people can also get informed and avoid costly errors. Here are five stupid refinance mistakes and the smart ways to avoid them.

1. Assuming your home's value hasn't dropped

Why it happens: Homeowners especially can be over-optimistic (even delusional) about home values.
A recent study concluded that homeowners consistently overestimate the value of their property by 5 to 10 percent, and those who bought at the height of the market are most likely to make this error. Even in neighborhoods where every third home is in foreclosure, some residents don't see the connection between their neighbors' home equity erosion and their own. This causes them to waste money for appraisals when they haven't a snowball's chance in hell of getting a refinance.
How to avoid it: You can handle the truth! Check several online valuation systems to get a possible range of values for your home. Request the opinion of a real estate agent who sells a lot of homes in your neighborhood. When considering a refinance, know what value you need to conclude the transaction and then determine how likely your home is to appraise at that value.


2. Refinancing with your current lender without rate shopping
Why it happens: Because we're slackers when it comes to not-fun things like mortgage shopping.
Retention strategies are programs designed to recapture customers considering a refinance without putting silly ideas into the pretty little heads of other customers. Inquiring about your mortgage balance can trigger a call and a refinance offer from your lender. It can tempt you to take a higher-than-market mortgage rate by making it easy with a pre-approved or streamlined process.
How to avoid it: Your lender is not your friend--don't assume that it's giving you a special deal. Compare your lender's quote with others--see what rate you'd qualify for at the same costs as your lender's offer, and get these quotes in writing. If you can do better elsewhere, inform your lender and you may be offered a better deal--or refinance elsewhere for a lower rate.

3. Skipping your mortgage payment during escrow
Why it happens: We hear what we want to hear.
Well-intentioned advisors like this guy who recommends applying for a refinance, skipping your payment, and spending it on Christmas gifts(!), can make you think that there is some kind of fabulous free lunch associated with mortgage refinancing. However, if your new loan closes late, the missing payment could end up on your credit report and even increase your refinance rate. That could give you a nasty case of indigestion.
How to avoid it: Make your mortgage payment on time (or even early if you don't do it online) each month until your refinance has closed. If you overpay your old lender, the money will be returned to you. Understand that refinance transactions may take longer than purchases because lenders give purchase mortgages priority.

4. Making purchases on credit
Why it happens: Spending money feels awesome! But it shouldn't--Matt Hackett, an underwriting manager with Equity Now, explains.
"Most lenders pull a 'no score report' or a 'soft pull' which does not show credit scores, but shows any updated balances, payments, and/or new accounts which have been opened since the original credit inquiry."
This report can kill a refi.
"If there are new inquiries or accounts, the borrower will have to explain them and the loan will go back to underwriting," says Todd Huettner of Huettner Capital. "At a minimum, this could cause delays. If a new account exists, then it must be documented and the liability must be included in the debt-to-income analysis."
Borrowers' errors can be costly.
"They will save $100 on a new TV if they open a store credit card but wind up paying thousands more on their refinance," says Huettner.
How to avoid it: Certified Mortgage Specialist and author of Stress Free Mortgage Linda Fleischmann says, "I make sure that my clients are very aware of the 'do not apply for new credit' rule as well as having them call me prior to making any large purchases." So hide your credit cards and don't give your Social Security number to anyone until your mortgage refinance is closed and funded and you hear the fat lady singing.

5. Overestimating self-employment income
Why it happens: We equate income with winning and we don't want to be losers. Everyone has a friend who always comes back from Vegas claiming to have "won" thousands. And he did win, if you ignore the losing hands!
New business owners tend to do the same thing, counting the revenue (winning hands) while disregarding expenses. Borrowers who gross $10,000 a month might list that figure on their refinance application, but lenders look at tax returns. Many applicants find that the $10,000 a month they claim in earnings becomes $2,500 a month when mortgage underwriters get through with it.
How to avoid it: Understand how lenders evaluate your income. At its simplest, self-employment income for mortgage lending purposes is your taxable income plus depreciation and home office expenses. Lenders use Fannie Mae form 1084, Cash Flow Analysis, to calculate it.
Before refinancing, make a more realistic estimate of self-employment income and run it through a mortgage prequalification calculator to see if you earn enough to get approved. And know that underwriters don't think you're a loser even if they do cut your income.
So, no matter how smart you are, know that everyone is capable of making a dumb refinance mistake. But if you follow these five rules, you'll have the best shot at a seamless refinance.