Self-employed borrowers sometimes face more challenges when getting a home loan by stating their income. If you have an income that is more difficult to document, this can make it more difficult for the underwriter to approve your mortgage application and this is where the bank statement loan comes in.
Bank statement mortgages differ from traditional loans as lenders rely on bank statements rather than tax returns and recent pay stubs to verify a borrower’s income. Each lender establishes its own underwriting criteria to calculate net income (income minus business expenses and taxes), and if one lender doesn’t approve your application, there might be another with different requirements that will.
These Non-QM loans are provided by non-qualified mortgage lenders. Non-QM status means the loan cannot be sold to government-sponsored entities like Freddie Mac or Fannie Mae, which is the case with most loans. Keep in mind that not all lending sources offer non-prime loans, so it’s essential to explore various options in your search.
Why Are Bank Statement Mortgages Are so Popular Today?
The reason is that mortgage underwriting standards got tougher per federal law after the mortgage meltdown of 10 years ago. Too many no documentation mortgage options and stated loans were approved where the income of the person was not well documented. Today, most conventional mortgages require the underwriter to carefully document the borrower’s income, which is typically done with W-2s, bank statements and pay stubs. If you do not have W-2s and pay stubs as a business owner, what do you do?
Enter the bank statement loan program. This option can be a good deal for consumers who earn seasonal income, get commissions, are contractors or are self-employed.
For example, there are borrowers out there who are self-employed construction workers who have a strong business but not on paper. They may have a lot of income every month, but because of many business expenses, he does not report enough income to qualify for a regular mortgage.
But a bank statement loan program or a self-employed mortgage does not typically require tax returns, so the write offs are not usually a problem. In these cases, the person’s monthly bank deposits over the previous two years may be enough to qualify him for a bank statement mortgage loan. Lenders that offer a bank statement loan program for self-employed borrowers average the monthly bank deposits for the past one to two years.
For example, let’s say a construction worker has bank deposits coming into his bank for six months that vary between $5,000 and $9,000. The six-month average might be about $6,000. The lender after seeing this type of average for one or two years, may be able to base a mortgage approval on that average amount.
The down payment requirements and the rate may be a bit different than a traditional mortgage, but at least the self-employed borrower can get a mortgage. And, if the borrower earns more money next year and reports it on his taxes, he may be able to move into a conventional loan or government backed loan with a lower rate. The modern bank statement loan is less of a risk than stated-income loans that were so popular when George W. Bush was President.
Bank Statement Loans for Real Estate Investors
Although no-income loans are not applicable for owner-occupied properties and are not designed for purchasing a primary residence, they remain accessible for individuals seeking to buy an investment property. This proves advantageous for borrowers such as real estate investors, house flippers, aspiring landlords, and self-employed individuals aiming to acquire a non-occupant property. With bank statement loans, these real estate investors can qualify for a loan program without the need for complete documentation of their income or the provision of tax returns.
Can I Get a HELOC with Bank Statements?
Yes, there are a few HELOC lenders that offer credit lines with alternative income documentation. Homeowners who need a stated income loan have the potential to meet eligibility criteria for both a HELOC and a home equity loan. However, the application process for these loans typically involves more paperwork compared to traditional loan applications. Lenders must undertake thorough verification to ensure the accuracy and reliability of the stated income before granting approval for the loan or line of credit. In this context, many second mortgage lenders may request 12 months of bank statements to validate the income information provided by the borrower.
Other Alternative Loan Options
Even after the last economic downturn, it is still possible for some self-employed borrowers to get approved on the basis of their income on their tax returns. The only exception is if you are writing off a lot of business expenses; in that case, the bank statement loan could be your best bet.
But for others who have fairly steady income that is reported on tax returns, you have plenty of options. One of the best for people with average credit scores and lower down payments is the FHA loan.
This loan is backed by the Federal Housing Administration. Because it is government backed, it is possible to get approved fairly easily, and to have a low interest rate. In June 2023, the FHA rate was slightly less than the conventional loan rate for a 30-year fixed loan.
To be approved for an FHA loan as a self-employed borrower, you do need two years of tax returns that show enough income to qualify for the mortgage you want. Also, you should supply a few months of bank statements and a profit and loss statement for the year.
If you have these things in hand, you can probably get approved for an FHA loan being self-employed. You only need to have a 580-credit score to be approved for a 3.5% down payment as well. The FHA program does come with pricey mortgage insurance, but this is a fair price to pay for getting a loan with a low rate and only 3.5% down.
The bottom line for self-employed borrowers is it is very possible to get a approved for a mortgage loan in 2018! A bank statement loan is the best idea for people with a lot of tax write offs and/or seasonal income, while the FHA option is a great deal if you have self-employed income that is high enough on your tax returns.