Whether you are buying or refinancing a home, one of the main requirements to qualify for a mortgage loan is documentation of income.
For a lot of prospective borrowers especially those who are self-employed, entrepreneurs or freelancers, this sometimes poses a problem as they may not necessarily show all income on their tax returns and thus, hold them back from accomplishing homeownership.
How the bank statement loan is a solution
Unlike the other loan options, this special program uses bank statements to calculate a borrower’s income.
This is an alternative documentation loan option rather than relying on tax returns and W-2s in the application procedure. Specifically, these loans are for self-employed borrowers who typically have substantial tax write-offs that make it challenging to demonstrate the necessary income to prove their ability to repay the loan. Thanks to this program, the lender utilizes either personal or business bank statements to qualify borrowers.
Qualifying for a bank statement loan
Even though the qualifications are similar to those of a regular mortgage, borrowers must understand there is additional criteria to be met when qualifying for this loan. Some of the major requirements are:
- The borrower must be self employed for at least 2 years
- 12 or 24 months of personal or business bank statements
- Borrowers can own as little as 50% of the business for business bank statements and 25% for personal bank statements
- 640 minimum credit score
- Minimum 10% down payment for borrowers with 660 or better credit score. if the borrower’s FICO is 640-659, the minimum down payment is 15%.
What are the differences between a bank statement loan and a traditional mortgage?
Bank Statement Loans:
These loans are built for people who do not have W2 jobs such as business owners, realtors, consultants, restaurant owners, and gig economy workers.They allow borrowers to use bank statements as the form of proof that they are able to pay back the loan amount.
Traditional mortgages (Conventional, FHA loan, VA, USDA)
Government backed loans or conventional mortgages are the most used ways of buying a home. They suit most borrowers especially those who are employees of companies or rely on retirement income. Self-employed borrowers can also apply for these loans but they do require a 2 year tax history in order to qualify.
Advantages of the bank statement loan
In summary, these are the advantages of a bank statement loan:
- The lender does not need to look at your tax returns or tax transcripts.
- Your income statements are made up of regular monthly income deposits.
- The lender can look at 12 or 24-month bank statements.
- If you own a business, you can show 24 months of business statements and a P&L statement for the same period. A P&L statement (profit and loss statement) is prepared by a Certified Public Accountant. Not all business owners will be required to present one.
- You can get a bank statement home loan for as little as 10 percent down.
- No PMI required even with a down payment under 20%
- You can do a cash-out refinance loan of up to 85 percent of the value of your property.
- You can borrow up to $5 million.
- Typically, bank statement lenders will accept a debt to income ratio of a maximum 55 percent.
- You have other term options not offered with regular mortgages such as interest only, and even 40 year loans.
Difference between a bank statement loan and a conventional mortgage
For most people, conventional loans are the main option for mortgage financing.
However, these do require full credit, income and asset documentation but regarding the income, the lender must obtain a verification of income, W2s, pay stubs or 2 year tax returns for self employed borrowers.
This is where the bank statement program shines, as a business-owner borrower does not need to provide for tax returns or 1099s to proof income. The lender can calculate the borrower’s income through the deposits made in the bank.
Is a bank statement loan the right option for you?
If you are a self employed borrower, or contractor and you do not show sufficient net income on your tax returns to qualify for a regular mortgage loan, the bank statement program may be the right option for you. However, do understand that these loans have a drawback and that is the interest rate.
Because these loans are not insured by a government agency such as the other mortgage options, lenders are taking on more risk. Therefore, the borrower will have a higher rate than those offered with a conventional mortgage or FHA.
The winning strategy here is that if you know you have an income issue due to your tax returns or if you owe back taxes to the IRS or have a debt with the IRS, then this program may be ideal for you.
At Andes Mortgage LLC., we have multiple relationships with lenders who offer the bank statement programs with excellent terms. We strive in helping self employed and entrepreneur borrowers achieve their goal of homeownership and have made this program a priority in our portfolio of loans. If you want to check how much home you can afford and whether or not this program is right for your personal situation, click this link to get started.
