While the mortgage crisis from 10 years ago may have changed the way banks offer mortgages, 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 loan 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 a bank statement mortgage but with less documentation. These loans were often referred to as stated income loans. 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 the modern stated income loans are not that simple, they still provide a great lending option to people that own their own business.
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 deposits and then use a percentage amount of the average to determine the borrower’s annual income.
Benefits of the Alternative Document Mortgage
Using bank statements to qualify for stated income loans 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 bank statement 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.
Rules for Bank Statement Loans
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
- Minimum down payment for a purchase is 10% if the customer has a credit score of at least 720. Credit scores between 660 and 720 will require a higher down payment
- Borrowers will need to provide copies of personal bank statements for the last 12 to 24 months. Business bank statements may also be requested.
- Borrowers will need to have sufficient reserves in order to qualify for the loan. For loan amounts, up to $1,000,000, the borrower will need to have at least 6 months of reserves. Loan amounts between $1,000,000 and $1,500,000 will need to have 9 months of reserves. Loan amounts over $1,500,000 will require at least 12 months of reserves.
If you meet the above criteria, then you may have a chance of getting a bank statement loan.
Bank Statement Jumbo Loans are Available
You may have noticed in the previous section that loans of over $1,500,000 can be financed with the bank statement loan. This is yet another benefit to self-employed borrowers.
Jumbo loans have been around for a long time but qualifying for the loan is usually a bit more restrictive than conventional loans. Add to that the fact that many jumbo loans require a 15% down payment, or more, and you can see why people shy away from these deals.
The bank statement loan removes some of those barriers. Provided that you have a credit score above 660, along with the necessary reserves, the bank statement loan could be a great way to help you finance your next jumbo home purchase.
Purchase Investment Properties with Bank Statement Loans
People that are self-employed and having 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.
The 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 loan as well.
The bank statement loan 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 loan. All of the same rules will apply as a purchase loan.
Various Terms for Repayment
Bank statement loans have various repayment terms, just like conventional mortgages. Customers may choose a 30-year fixed loan 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, the bank statement loan 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 Bank Statement Loans for Self-Employed Borrowers
For self-employed people with a strong credit score and a healthy rainy-day fund, the new breed of bank statement loans can be a fantastic way to purchase a home or investment property without the normal paperwork of a typical mortgage.
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