Bank Statement Mortgages: Everything You Need to KnowMay 01, 2022 by X2 Mortgage
Mortgage eligibility can be much simpler than you think. You only need to ask the right questions and gather the right information before starting your application process.
A bank statement mortgage is a home loan option that allows you to obtain financing using only your bank statements for 3, 6, 12, or 24 months, depending on your lender. This option is primarily available to self-employed individuals who cannot provide traditional income verification documents such as pay stubs, W2s, and enough claimable income on tax returns.
There are currently over 34% of contractors, business owners, and gig workers with no salaried income in the US economy, and the number is growing. As a result, more flexible options for obtaining financing for home purchases and other investments continue to emerge. And a bank statement program is one of them.
Read on to learn everything you need to know about bank statement mortgages, and you'll soon be able to fulfill your dream of becoming a homeowner.
What is a Bank Statement Mortgage?
A bank statement mortgage is a type of non-qualified mortgage (Non-QM) that enables eligible borrowers to qualify for a home loan using bank statements rather than tax returns.
This loan is also referred to as a "self-employed mortgage" or "alternative documentation loan." Hence, it is an excellent option for self-employed individuals, business owners, and retirees who require an alternative income verification option to prove their ability to repay a home loan.
Bank statement mortgages are provided by traditional lenders such as mortgage banks, brokers, and private money lenders. However, not all lenders offer the program.
How Does A Bank Statement Mortgage Work?
To qualify for a traditional mortgage, a borrower must typically provide documentation of his income in pay stubs, W-2s, tax returns, and other income verification documents approved by Fannie Mae and Freddie Mac. Unfortunately, these traditional requirements are only easily accessible to individuals with a regular monthly income or on the payroll of a company.
If you are self-employed, you may be unable to provide a pay stub or W2s. Therefore, even if you have a tax return, it may not accurately represent your true income capacity, especially if you do not have a consistent source of income. Similarly, tax returns will typically record as your income what remains after tax deductions. As a result, using traditional documents may limit your borrowing power.
However, when applying for a bank statement mortgage, your lender will only require your business or personal bank account statements to be sure that you can afford all payments involved in your mortgage.
A mortgage lender may request as few as 3 months of bank statements or as many as 24 months showing regular deposits. The longer the period of statements, typically the better financing terms you get.
The lender also verifies your bank statements by calling your bank or by completing and mailing a verification of deposit (VOD) request to your bank.
If your bank statements are free of any questionable items, you are much more likely to be approved for a home loan.
Types Of Bank Statement Mortgages
1. Personal Bank Statement Loans:
You must submit a personal bank account statement to prove your income history with this type of loan. Personal bank statement loans are ideal for people who work multiple jobs, such as freelancers, contractors, and gig workers, who are likely to receive payment from multiple sources with no consistent cash flow.
You must have a good credit score of 620 or higher.
A low debt-to-income ratio (DTI); not more than 45%
It can only be used for a limited loan amount, not more than $2.5 million.
You must provide bank statements for the last 3, 6, 12, or 24 months.
Many lenders may consider 100% deposits as your income, but can also require business receipts.
2. Business Bank Statement Loans:
For this loan option, your business account statement is accepted as proof of your income for this loan option. It is ideal for owners of registered and licensed businesses. And it can be used for almost any type of business as long as it has a business account,
A business statement should not be mixed with a personal statement.
Both the business and the bank statements should be in good standing.
You must provide bank statements for the last 3, 6, 12, or 24 months.
Most lenders consider 50% of deposits as your income.
Eligibility and Requirements For A Bank Statement Mortgage?
Proof of Income
Your bank statement serves as proof of your income. Your lender will need to see proof that you have enough money in your account to cover a down payment, as well as enough money coming in to cover your monthly payments.
While many financial institutions require bank statements from the previous 12 months, some require bank statements from the previous 24 months in order to obtain a more comprehensive picture of your income.
Verifiable Source of Income
It is not enough to have a large sum or a consistent deposit in your bank account. Your lender and underwriter also want to know where the money is coming from to protect them against fraud and money laundering.
Thus, to qualify for a bank statement mortgage, your funds must be "sourced and seasoned."
Sourced means that it is clear where your money is coming from and that you can provide written explanations for any unusual or large deposits into your account.
Seasoned means the money has been in your bank account for a reasonable amount of time, at least 60 days in some cases.
Also, you can qualify for a loan with multiple sources of income. For example, some lenders accept statements from various bank accounts, though combining personal and business accounts is usually not permitted.
Because a bank statement mortgage is a non-qualified loan, the credit score requirement is largely governed by individual lenders.
To qualify for a bank statement mortgage, you must have a good credit score, which can be as high as 620. Also, the higher your credit score, the better your chances of loan approval and the lower your interest rate.
Bank statement mortgages are non-conforming loans, so your lender may require a higher down payment of 10% to 20% for purchases. However, your credit score can influence the amount of your down payment. This is because a good credit score is a lower risk for lenders.
For example, if your credit score is 620, you are likely to make a 20% down payment. However, if your credit score is higher than 660, you will receive a smaller down payment.
To qualify for a bank statement mortgage, your DTI must not be more than 50% to qualify for a bank statement mortgage. Your DTI is the ratio of your monthly income to your monthly expenses and debt servicing (such as credit card payments, utility bills, and so on).
Note that the higher your monthly income, the lower your debt-to-income ratio (DTI), and a lower DTI can qualify you for a larger loan amount.
In addition to the basic loan requirements, individual lenders may require you to submit additional documents and fill out additional forms. This is standard mortgage practice.
Other documents required for eligibility include:
Valid identification cards or a driver's license.
Social Security Card.
A copy of your business permit or license (if you are a business owner).
Balance sheet (for business owners).
Profit and loss statement (P&L) for the current fiscal year.
Signed CPA letter confirming your business.
Evidence of any liquid assets, such as a 401(k) or investments.
How To Apply For A Bank Statement Mortgage
1. Find a Bank Statement Mortgage Lender:
Not all lenders offer bank statement mortgages. In fact, because of the risk associated with this type of loan, many banks and credit unions do not offer it. Luckily, starting with us at X2 Mortgage will save you some time and hassle!
We offer all sorts of different bank statement loans which will increase your chances of being approved.
2. Get Pre-qualified:
Before you start looking for a home, you should get pre-qualified and pre-approved, especially if you are in a seller's market. This is something your mortgage loan officer can assist you with.
To get pre-qualified;
Prepare your down payment, closing costs, and reserves. It shows your seriousness and readiness to a lender and can aid in loan approval.
After the down payment and closing costs, you should have at least 3-12 months of mortgage payment reserves.
Review your credit score; a minimum score of 620 is required to qualify for a bank statement loan.
3. Apply For a Loan:
Once you have confirmed that you meet all of your lender's eligibility requirements, complete the loan application online and submit all required documents, including proof of self-employment for a minimum of two years.
Your lender will then have an underwriter verify all of your documents, bank statements, and self-employment history.
4. Review Closing Costs:
Once you have met all of the loan terms, you will be approved for a loan. After that, you can go over your closing disclosure/settlement statement with your loan officer and have your agreement notarized. Then, pay the necessary closing fees.
5. Closing the Loan:
If all of the terms of the agreement have been met, your loan will be funded, and you will be able to purchase or refinance your property.
Pros And Cons Of Bank Statement Mortgage
Even if you do not qualify for traditional mortgage financing, you can still obtain a home loan.
Requires less documentation; you do not need to provide your tax returns or tax transcripts, W-2s, or pay stubs.
Your bank statements and not your tax return are required as proof of your regular monthly income deposits.
Some lenders will give a bank statement mortgage with as little as a 10% down payment.
It can be used to buy a primary residence, a second home, or an investment property.
It can be used for home purchases and refinancing.
You may be eligible for a loan sum of up to $5 million.
You can get fixed-rate and adjustable-rate loan options.
More stringent income verification requirements. For example, as a self-employed borrower, you must be able to prove that you have been self-employed for at least two years; and if you don't meet that requirement, you may be disqualified for the loan.
It needs a higher down payment and comes at a higher interest rate, although these depend on your credit score and overall financial situation.
You risk losing your house if you don't make payments.
All lenders do not offer bank statement mortgages.
If you are unable to qualify for a traditional loan due to complicated income documentation, a bank statement mortgage is your best bet. You no longer need to rely on pay stubs, W2s, or even tax returns to obtain financing for a home purchase.
However, a bank statement mortgage is not the only mortgage option available to self-employed people, and the interest rate is higher. So, if you can qualify for a conventional loan, then that is always the ideal route.
Hopefully this guide has given you sufficient information to kickstart your home-buying journey!