Owning a home might be a dream to many people; that is why a mortgage is a financial product designed to make owning a home possible. However, qualifying for a mortgage loan can be challenging for some borrowers, and it became more cumbersome after the financial meltdown of 2008. As a result, government regulators became stricter in their regulatory duties to protect potential homeowners. For instance, the Consumer Financial Protection Bureau (CFPB) was established in 2014 to regulate and enforce strict guidelines before a financial institution can issue a mortgage loan.
The guidelines require the borrower to provide more documentation to prove the ability to repay the loan (the ATR rule. To make the process of getting a mortgage more flexible, some financial institutions have some financial products like bank statement loans and asset-based loans. Bank statement loans are a broad term for a residential loan program that requires bank statements as a criterion for securing a loan. There are 3-month, 12-month, and 24-month bank statement loan programs. The need to offer flexible mortgage products has broadly divided the market into “Qualified (QM)” and “Non-qualified (Non-QM) “mortgage products.
It might be necessary to inquire why bank statement loans are better than other products. According to guidelines of the Federal Housing Authority, CFPB, and other similar regulatory bodies, consumers of mortgage products must provide at least W-2s or paystub forms. A W-2 form is a wage and tax document that employers, by law, have to send to employees and IRS; it details an employee’s wages and deductions, such as income tax, FICA taxes, etc. However, not everybody seeking a loan may have a W-2 or Paystubs. For instance, you could be self-employed. To qualify as a self-employed borrower, you must have a business with at least 25% ownership and two years of experience running the business. Self-employed people usually do not have W-2s. Instead, they may have the 1099s. Other “Non-W-2s” employees like realtors, retirees, contract workers, gig economy workers, and consultants can use non-qualified mortgage products to purchase a home. The 3-month bank statement loan program, part of non-qualified loan products, allows you to qualify with alternative documentation.
The three-month bank statement program is precisely that: all you have to do is provide your latest three months of business or personal bank statements, and the lender will interpolate that into a monthly income.
Here’s an example: let’s say that your latest three-month bank deposits average $10,000 for each statement cycle. So the lender will add the three months deposits of $10,000 a month, Which is $30,000 and divide it by three, thereby coming up with a monthly “Income” Of $10,000 per month.
The lender will still require additional information, such as your credit history. Other factors like loan-to-value ratio (LTV) will also play a role in the kind of mortgage available to you. LTV means the percentage of the loan to the property value. For example, an $80,000 loan on a property valued (Appraised) at $100,000 means that the loan-to-value is 80%. The higher the loan-to-value, the greater the risk and the higher the rate and fees. Some Non-QM lenders offer between 80%-90% LTV loans.
Since, for “Income” documentation, you only provide your bank statements for three consecutive months, the lenders are taking a significant risk in offering the loan. The higher risk will carry a higher interest rate. Do not mistake comparing this type of loan to conventional loans from Fannie Mae and Freddie Mac. The financial crisis of 2008 occurred because lenders were originating residential loans that buyers eventually could not repay. The bank statement loan program could go on this path if not properly underwritten. Keep in mind that bank statement loans require “Reserves” for six to twelve months to ensure that the borrower can make the mortgage payments in case there’s a bump in the road with deposit “Income.”
You might wonder if the non-qualified mortgage does not meet the standard criteria, is it an excellent product to buy? The regulatory authorities have your best interests in view and want you to buy a financial product that makes sense. Nevertheless, some lenders have been operating in the industry for a long time and have goodwill to protect. The bank statement loan program may be a good fit, given your circumstances. As pointed out, it serves a segment of the borrowing population that may otherwise not qualify for a conventional loan such as FHA, VA, FNMA, or FREDDIE MAC.and CFBP do not adequately capture. Therefore, it is not enough to look for financial intuition willing to sell non-qualified mortgage products that include a 3-month bank statement; you need to look for one with a track record.
The main idea of asking for consecutive bank statements is the same reason W-2 forms are needed; the lenders or underwriters need to know your ability to pay. Therefore, the information required is to determine the reliability of your cash flow. The rule of thumb is that bank statements showing a flow of income and expenses for more than two months are enough to reflect the stability of your income. It is a journey a lender wants to take with you and to make it easier. For some, three-month history is enough for them. It is necessary to know that the 3-month bank statement loan is not only used to purchase a primary house; you can also use it to refinance an existing mortgage.