How to Get Your VA Cash-Out Refinance Loan Approved if You're Self-Employed

Getting approved for a VA cash-out refinance when you're self-employed comes down to proving stable income, maintaining healthy debt ratios, and documenting everything thoroughly. While the process requires more paperwork than it does for W-2 employees, the benefits of a VA cash-out refinance loan make it worthwhile.

What You Need to Know About VA Cash-Out Refinancing

A VA cash-out refinance lets you replace your current mortgage with a larger loan, giving you the difference in cash. It differs from a streamlined refinance in that cash-out loans require full underwriting, meaning lenders examine your finances in detail.

The VA allows eligible Veterans to access up to 100% of their home's value, though most lenders cap this at 90%. You must have made at least six monthly payments on your home and waited 210 days from closing your current VA loan before refinancing.

How Self-Employment Makes Things Different

Lenders see self-employment income as less predictable than traditional employment. When you receive a W-2, your employer vouches for your income. When you're self-employed, you prove it yourself through documentation. Business revenue fluctuates, and many self-employed folks claim deductions that reduce the income lenders use to qualify you.

According to VA credit underwriting guidelines, only verified income counts toward your ability to repay. For self-employed borrowers, that verification process takes more time and documentation.

The Documentation You'll Need

Plan to provide two years of complete personal federal tax returns with all schedules, signed and dated. If you operate as a corporation or partnership, include two years of business tax returns as well. You'll also need a current year-to-date profit and loss statement showing that your income remains consistent with previous years.

Many lenders request business bank statements from the past two to three months. These verify that reported income flows through your accounts and that your business maintains adequate reserves.

If you've been self-employed for less than two years but worked in the same field previously, you might still qualify. VA guidance notes that underwriters may consider candidates with one full year of documented self-employment plus past employment in the same line of work.

How Lenders Calculate Your Income

Lenders focus on net income, which equals total revenue minus business expenses. They typically average your net income from the past two years of tax returns. For example, if you reported $80,000 last year and $70,000 the year before, your qualifying income would be $75,000 annually, or about $6,250 monthly.

However, certain deductions get added back. Depreciation doesn't represent actual cash leaving your business, so it's added to net income. One-time expenses may also be added back with proper documentation.

If you have year-over-year income declines, lenders will want explanations. What they consider a significant drop varies by lender and depends on individual circumstances. If your current year-to-date earnings show declining income, approval becomes more challenging.

Meeting Credit and Debt Requirements

While the VA doesn't set minimum credit scores, most lenders require at least 620 for cash-out refinances. Scores above 640 improve your terms and strengthen your application.

Your debt-to-income ratio compares total monthly debts to gross monthly income. DTI includes your new mortgage payment, taxes, insurance, credit cards, car loans, student loans, and other recurring debts.

Self-employed borrowers often struggle with DTI because business deductions reduce qualifying income while debts stay constant. Residual income adds another layer. This metric measures money remaining each month after paying your mortgage, debts, and estimated utilities. The VA uses it to ensure Veterans have enough for daily necessities.

Overcoming Common Obstacles

Heavy business deductions create the biggest challenge. While smart for taxes, they reduce qualifying income. Finding the right balance requires planning, potentially years before applying.

If you’ve recently started a business, this can cause difficulties. Most lenders want at least two years of self-employment history. Starting your business after years in a related field helps, but you'll need to make your case to underwriters.

Income volatility creates uncertainty. Seasonal businesses or those with uneven revenue need extra documentation showing that income averages acceptably over the year.

How to Strengthen Your Application

• Start organizing documentation early. Gather two years of tax returns with all schedules, ensuring everything's signed and filed with the IRS. 
• Work with a lender experienced in VA loans and self-employed borrowers. Expertise varies significantly, and some lenders are better at structuring applications to maximize your qualifying income.
• Pay down debts strategically to improve your DTI. Eliminating small credit card balances or paying off a car loan can make a real difference.
• Consider accessing less equity. A smaller loan means lower monthly payments, potentially making the difference in meeting DTI and residual income requirements.
• Maintain strong bank balances. Substantial reserves show stability and serve as compensating factors if other aspects are borderline.
• Keep business and personal finances separate. Commingling funds creates verification problems. Clean records make the process faster.

The Application Process

You'll need your Certificate of Eligibility proving VA loan eligibility. Get it online or request it through your lender.

A VA-approved appraiser will evaluate your home's market value and verify it meets minimum property requirements. Income verification for self-employed borrowers may take longer than standard verification. Lenders may verify your business exists through a CPA or state registry.

Common follow-ups include explanations for income fluctuations, clarification on business expenses, or additional documentation on irregular deposits, so try to respond to these promptly.

You'll pay a VA funding fee of 2.15% for first-time use or 3.3% for subsequent use. Veterans receiving VA disability compensation are exempt. Due to the federally required three-day right of rescission on refinances, you'll receive your cash proceeds a few days after closing.

Self-employed Veterans successfully use VA cash-out refinancing every day. The key is understanding requirements, preparing thoroughly, and working with experienced lenders. 

Read more about VA refinancing to explore your options and access your home's equity.

FAQs

Can I qualify with only one year of self-employment?

Qualifying with less than two years is challenging but possible with at least one full year and a background in the same field from prior employment. You'll need documentation and explanation.

How do business losses affect approval?

Business losses complicate approval significantly. Losses can't be used in income calculations, effectively making that year count as zero income. Consecutive losses often result in denial.

Can I refinance a non-VA loan?

Yes, VA cash-out refinancing works with any mortgage type as long as you meet eligibility requirements and the home is your primary residence.

What if my income decreased this year?

Temporary drops due to circumstances like illness or pandemic-related disruptions require thorough documentation. If you can show the decrease is temporary with evidence of recovering income, some lenders may work with you. 

Can my spouse's income help?

Absolutely. Including a non-self-employed spouse's W-2 income can significantly strengthen your application. Their income requires verification and improves debt-to-income and residual income calculations. Both spouses will be on the loan.