Bank Statement Loans Guide

If you’re self-employed or perhaps a gig worker looking to purchase a home, a bank statement loan may help. Having a bank statement loan, you be eligible for a a home loan according to your bank statements rather than tax returns.

What is a bank statement loan?

With a bank statement loan — also known as a stated income loan≈you won’t have to provide your lender with a few from the typical financial documents needed for a home loan, for example W-2s and tax statements. Instead, you’ll use bank statements to prove income. This can be helpful in case your income is inconsistent, your employer doesn’t issue traditional paychecks or else you claim significant tax deductions. This might apply if you’re a doctor, lawyer or realtor, for example.

“An example could be if your tax returns show that you’ve made $100,000 last year whenever you made $200,000 since you were able to deduct an expensive printing machine you bought,” says Brad Seibel, head of Mortgage at Sage Mortgage. “Your bank statements, rather than your tax statements, would adequately show your earnings.” (Editor’s note: Sage Mortgage is owned by Bankrate parent company Red Ventures.)

Bank statement loans are thought riskier, however, and many banks and mortgage companies don’t offer them. That’s because they’re non-qualified (non-QM) mortgages, meaning they aren’t backed by Fannie Mae and Freddie Mac, so there’s less protection for lenders and borrowers.

How do bank statement loans work?

The application for a bank statement loan differs from what traditional mortgage. Whenever you apply, you’ll provide the lender bank statements from the past year or two years, rather than the past 8 weeks or 3 months, in addition to details about your company (such as profit and loss statements) and expenses. For those who have business and personal accounts, you’ll need to provide statements for both.

“The type of business, the amount of employees and whether the business includes a physical location are some of the questions that bank statement lenders may wish to know to determine the expense factor,” says Darrin Seppinni, president of HomeLife Mortgage, a California-based lender focusing on bank statement loans.

Although bank statement loans offer greater flexibility, they have downsides. These loans typically have a higher rate of interest, and it’s not uncommon for them to have a prepayment penalty. (Should you be prepared to refinance the borrowed funds later on, this penalty could throw a wrench in those plans.)

Depending on your credit rating, there is also to make a larger deposit. Generally, you are able to qualify for a bank statement loan with a score as little as 620, but a 700 or higher gets a rate plan and terms. A borrower working with HomeLife Mortgage which has a credit rating of 640, for example, should make a 20 percent deposit, while a borrower having a 660 score might get away with putting down 15 percent.

Who are candidates for bank statement mortgages?

“Good candidates for bank statement loans include small businesses, entrepreneurs, freelancers and gig workers,” says Seppinni.

This often includes full-time property investors, who qualify for bank statement loans based on revenue using their portfolio.

You may also consider a bank statement loan if your income can’t be documented inside a traditional way. For instance, some employers pay workers via prepaid cards instead of direct deposits.

How to locate a bank statement loan

If you aren’t already using a mortgage company who offers bank statement loans, a mortgage broker could possibly help you find one. A broker often has partnerships with several wholesale lenders, which provides them use of a variety of unique types of mortgages and deals. Brokers typically don’t charge borrowers for their services — instead, they charge the lending company, who then passes the cost onto you by means of fees or perhaps a higher rate. When you compare brokers, ensure whoever’s in your short list is licensed to work where you live and it has experience with bank statement loans.

Alternatives to bank statement loans

Conventional loans: Conventional loans can be found through virtually every mortgage company. They tend to offer far better interest rates and terms when compared with bank statement loans. Simply put, “if you have pay stubs, it’s a far greater deal to submit pay stubs,” says Seibel.
FHA loans: FHA loans are especially well-liked by first-time homebuyers because of their flexible qualification criteria.
VA loans: Eligible service members, veterans and surviving spouses can acquire a VA-backed mortgage without any money down.
Asset depletion loans: If you have no income but significant assets, a lender might be able to use those assets to qualify you for any mortgage. These kinds of loans are very pricey, however — it might be preferable to market some assets to obtain the funds to purchase a home.
DSCR loans: If you’re a real estate investor, you may qualify for a debt service coverage ratio (DSCR) loan, which is based on your portfolio’s cash flow and just how that relates to your ability to settle the mortgage. Keep in mind that when calculating the DSCR, lenders are usually conservative and take into account higher expenses and a vacancy rate.
Interest-only loans: You’ll only pay interest for that first couple of many years of the loan’s term, then pay both principal and interest. This prevents your costs low for some time, however, you also won’t build any equity during the promotional period, and you will not be able to pay the principal and charges once they start working.
Portfolio loans: When a lender issues a portfolio loan, it retains that loan in the portfolio versus offloading it around the secondary mortgage market. Because of this, these kinds of loans convey more flexible qualifying standards. They aren’t always advertised, however, and are typically reserved for high-value customers or people who already have rapport with the lender. If you’re an investor, consider maintaining your accounts with a portfolio lender. This could provide you with a advantage when you need a home loan.

Is a bank statement mortgage best for you?

A bank statement loan might be to your advantage if your tax statements don’t adequately reflect your earnings. The fact is, however, many self-employed workers are entitled to other, more traditional kinds of mortgages, even with inconsistent income. Given that bank statement loans have considerable downsides, it’s crucial to carefully consider all options.

“No one should find yourself getting a bank statement loan should you actually have the income that qualifies for a traditional loan,” says Seibel.

The bottom line: Apply for a regular loan first.