Our client, a Florida attorney, left his position at an international law firm to launch his own firm. To fund his business operations, he wanted to get a cashout refinance on his home in Lake Worth Beach, Florida.
However, when he applied to a conventional lender, he was denied. His practice was only a few months old, so he lacked sufficient self-employment income history to qualify under traditional underwriting.
Also, his assets were nearly depleted from starting his company, and what he had left was scattered across multiple accounts at different banks.
Further complicating matters, his credit score dropped after he had maximized his credit cards to launch his practice.
With the urgency to tap into the equity in his home to keep running his law firm, he turned to us for help.
Because our client’s self-employment income was too new, he was an ideal candidate for a no-ratio loan.
A no-ratio loan is a mortgage for owner-occupied properties that does not require any calculation of the borrower’s debt-to-income ratio (hence why it’s called “no-ratio”). Quite simply, there is no verification of employment or income required, and DTI is not calculated at all.
Instead, the focus shifts to 3 other factors, all of which our client was well-suited for.
First, for cashout refinance requests, no-ratio lenders typically only allow up to 60% to 75% LTV. Our borrower was willing to accept a happy medium of 65% LTV to demonstrate his commitment and financial capability.
Second, no-ratio lenders require a minimum credit score of 660 or 680. Our client’s credit score was in the 670s with room for improvement.
Third, as a tradeoff for not having to document income, no-ratio lenders require enough post-closing reserves to make at least 6 to 12 months of mortgage payments. Fortunately, since our client’s assets were relatively low, no-ratio guidelines allow cash-out proceeds to be used to satisfy the reserves requirement.
The underwriting process was straightforward since there were no income or DTI requirements.
Before closing, we worked with the borrower to increase his credit score from the 670s to the 690s. With the higher credit score, he obtained a better interest rate and higher LTV.
We successfully closed the loan, and our client was able to use the cashout proceeds for much-needed working capital for his firm’s operations.
This transaction demonstrates how no-ratio loans can be ideal solutions for professionals who have recently transitioned from W-2 employment to self-employment and can’t provide a 12-month income track record through tax returns or business bank statements.
DAK Mortgage is a licensed mortgage broker that can navigate you through the process of finding the right loan for your needs.
