While the mortgage crisis from 10 years ago may have changed the way mortgages are offered, bank statement loans are still available under the right circumstances. These loans will require some documentation for the down payment and income, but they can be a great alternative mortgage option for thousands of self-employed people.
More Than a Credit Score
Before the mortgage meltdown of 2006 to 2008, many lenders offered a form of bank statement loans but with less documentation.
Bank statement loans were often referred to as stated income. If a borrower had a sufficiently high enough credit score, usually 700 or more, then the lender would allow the borrower to get a loan without providing tax returns, bank statements, or any other type of documentation.
While modern bank statement loans are not that simple, they still provide a great lending option to people that own their own businesses.
Savvy business owners hire professional tax accountants to help them take advantage of every tax law and reduce their business income with legal deductions, thus lowering their tax liability at the end of the year.
However, the lower income reported on tax returns eliminates business owners from qualifying for the home of their dreams. This is where the alternative documentation can come in handy and allow borrowers to prove their income in a different manner.
The alternative documentation is a compilation of bank statements from 12 months or even 24 months. Bank statements will show deposits over the long term and indicate that the business is generating a profit that the owners are using for their personal use.
Lenders will average all of the eligible deposits and then use a percentage amount of the average to determine the borrower’s annual income.
Using bank statements to qualify for a mortgage provides several benefits to the borrowers.
- Borrowers can qualify for a higher loan amount compared to the income reported on their tax returns.
- Does not require tax returns or any other proof of pay
- Down payments can be as low as 10%
- Interest rates for these loans are only slightly higher than rates for mortgages offered by Freddie Mac and Fannie Mae
This makes the loan process much easier on the borrower and gives them the opportunity to buy a more expensive home.
Before plunging into one of these mortgages, borrowers need to be aware of the basic requirements to see if they can qualify for the loan
- All borrowers have to be self-employed. Furthermore, borrowers will need to have a minimum of 2 years with their current business
- The minimum down payment for a purchase is at least 10%
- Borrowers will need to provide copies of personal or business bank statements (depending on where income is deposited) for the last 12 to 24 months.
- Borrowers will need to have sufficient reserves which can vary depending on a number of factors. The bank will also verify all assets.
If you meet the above criteria, then you may have a chance of getting a bank statement loan.
Bank Statement Jumbo Mortgage
Loans up to $3,000,000 can be financed with this mortgage. This is yet another benefit to self-employed borrowers.
Jumbo mortgages have been around for a long time but qualifying for the loan is usually a bit more restrictive than conventional mortgages. Add to that the fact that many jumbo mortgages require a 15% down payment, or more, and you can see why people shy away from these deals.
This mortgage removes some of those barriers. Provided that you have a credit score of at least 620, along with the necessary reserves, this mortgage could be a great way to help you finance your next jumbo home purchase.
People that are self-employed and have success in their business are usually looking for ways to diversify their investments and build wealth for the future. One of the most common ways is buying investment property such as a rental property or a multi-unit building. Bank statement loans can help with this as well.
A traditional mortgage for an investment property would require the borrower to document their personal income with tax returns, W-2 forms, and business tax returns for their business. They would also wish to see a profit and loss statement for the intended investment property that showed annual rent income, vacancies, and necessary maintenance fees.
Bank statement loans make it much easier to buy an investment property. With a down payment ranging from 20% to 25%, qualified borrowers can purchase a property and start on the path of being a landlord. The reserve requirements mentioned earlier will still be in effect for an investment mortgage as well.
This program is not reserved only for purchase transactions. Using the same credit score, cash reserves and loan amount requirements, borrowers with existing mortgages may also apply for a cash-out refinance mortgage. All of the same rules will apply.
Various Terms for Repayment
There are various repayment terms, just like a conventional mortgage. Customers may choose a 30-year fixed mortgage or one of the multiple adjustable rate programs such as a 5-year ARM or 7-year ARM. Interest-only is also an available option but there are other limitations that go with it.
Seller Concessions are Also Allowed
Buying a home brings with it the necessary closing costs. These are costs paid to the appraiser, closing attorney, and other agencies that participate in the loan process. In order to help borrowers with their negotiations, this program will allow sellers to contribute up to 6% of the home’s selling price towards the closing costs.
If this can be negotiated between the real estate agents correctly, this can really help reduce the borrower’s overall out-of-pocket expenses at the time of closing.
Summing Up The Bank Statement Mortgage
For self-employed people with a strong credit score and a healthy rainy-day fund, the new breed of bank statement mortgages can be a fantastic way to purchase a home or investment property without the normal paperwork of a typical mortgage.