5 Reasons Why Bank Statement Mortgage Loans are Beneficial for Self-Employed Individuals

Buying a home is among the most significant purchases you’re likely to make, and before you take this step, you should ensure that your finances are in order. The first step to buying your dream house starts by checking your bank accounts and billing statements; it will give you an idea of how much you make and spend each month.

Some of the critical questions you may need to ask yourself include:

  • Do I have a stable job or income?
  • Can I save some money every month?
  • Do I have existing debts like a student loan or car payment?

After answering these key questions, you might want to consider applying for a bank statement mortgage loan.

What are Bank Statement Mortgage Loans?

Also known as bank statement loans, bank statement mortgage loans are a category of home loans that allow borrowers to get a mortgage without the regular documents required by most lenders to approve a loan. Sometimes, these loans bear other names like “self-employed mortgages” or “alternative documentation loans.”

Self-employed mortgages mainly work for independent contractors or business owners. They can also work for those who don’t have a steady income or have multiple employers to approve their salaries. The main point about these loans is that they are issued based on personal information and bank statements instead of tax returns or employer verification.

Requirements for Bank Statement Mortgage Loans

Since bank statement loans are non-qualified mortgages, each lender comes up with its own rules. These rules may vary from one borrower to another. For instance, some lenders may require 12 months of bank statements, but if you have a low credit score or other issues that may impact your creditworthiness, a lender may ask for up to 24 months of bank statements. Overall, the guideline for obtaining a bank statement mortgage loan includes:

  • Bank statements for the past 12 or 24 months
  • A reasonable down payment of usually 10% of the purchase price or more
  • Documented proof of cash reserves, which may include cash savings or assets
  • A decent credit score and clean credit report between 580 and 620 or higher
  • A business license if needed in your line of work
  • A profit and loss statement for the last 12 months of trading

Besides, a borrower may need a letter from a professional accountant or tax expert confirming tax filing in an appropriate self-employed category. In this regard, a borrower also needs to confirm that their expense deductibles are in order. Overall, some lenders are flexible and may not deny you a loan even if you lack one or two of these requirements.

5 Reasons Why Bank Statement Mortgage Loans are Beneficial for Self-employed Individuals

Bank statement loans offer the following benefits to self-employed individuals:

No Tax Returns or Pay Stubs Required

Regular lenders would ask for the average tax returns, form W-2, or pay stubs. Eligible non-self-employed individuals often obtain their W-2 form from their employers every year to verify proof of income. For self-employed individuals, this is not possible because they don’t have a standard employer.

The debt-to-income ratio doesn’t affect the loan

The debt-to-income ratio (DTI) is the term used to determine the amount of income a person or an organization generates to enable it to service debt. Lenders use this term to assess the borrowing risk of a person or an entity. A low DTI ratio may indicate sufficient income to service debt. However, it doesn’t matter whether the borrower has a high DTI ratio in applying for bank statement mortgage loans.

Borrowers can enjoy high loan limits

Usually, mortgage loan limits depend on various factors, including credit score and location. However, each lender can only give what it’s comfortable with. In the case of bank statement loans, borrowers can get high limits based on the prevailing FHFA rates.

Loans can be used for a primary residence, second home

Notably, there’s no restriction regarding what a borrower can do with a bank statement loan. The loan can be applied to a primary residence, a second home, or an investment property.

Manageable down payment

According to a report by the National Association of Realtors, down payment is the most challenging part of the home-buying process. Some homebuyers look for assistance to fund their down payments. However, most lenders offer manageable down payments, sometimes as low as 3% of the total mortgage cost for bank statement mortgage loans; this makes it beneficial to self-employed individuals.

Who Should Apply for Bank Statement Mortgage Loans?

Bank statement loans are often suitable for people without a steady cash flow. They are also ideal for those who can’t get proof of income from their employers. Generally, the following categories of people can benefit from bank statement loans:

  • Freelancers
  • Consultants
  • Doctors
  • Lawyers
  • Real estate investors and agents

People in these professions might find getting a standard or FHA loan demanding because the income on their tax returns is often adjusted for business write-offs and other necessary deductions. Consequently, it might not give a true reflection of the amount of income one earns.

Choosing a Reliable Lender

For anyone looking for a mortgage loan, it’s always important to shop from different lenders; this can give an open field for comparing offers. Consequently, borrowers can save a substantial amount of money on their loans based on quotes from different lenders.

Well, Bank Statement Mortgage Loans may attract higher interest rates. Besides, not all lenders can offer them. All the same, they remain a convenient option for a self-employed individual.  

Loans for Self-Employed Individuals

Self-employed individuals have always had a hard time getting a mortgage. Most lenders like to see income in steady, scheduled payments, and self-employment income is anything but that. If you’re self-employed, one option that you have is bank statement loans.

What Is a Bank Statement Loan Program?

A bank statement loan program is a type of mortgage that uses your bank deposits as income versus traditional proof of employment. Bank statement loans are different from conventional loans that look mainly at paystubs, W2s, and tax returns.

Many business owners have the problem that they can easily afford a mortgage but don’t have the income on paper to prove it. You may have been very aggressive with your business expenses and other tax deductions. That can reduce your net income on your tax returns, not indicative of your actual cash flows. Since you’re not an employee, you also don’t have pay stubs to fall back on.

How Are Bank Statement Loans Different from QM Loans?

A QM loan, or Qualified Mortgage loan, is a traditional mortgage. Employed borrowers qualify by showing their pay stubs, W2s, tax returns, credit scores, and assets (bank accounts, 401Ks, etc.) Qualified mortgage in this context isn’t restricted to mean employed mortgage. A self-employed person might qualify for a mortgage with the standard requirements. The problem is simply checking all of the boxes.

The main difference in applying for a bank statement loan is that your bank statements are used in lieu of tax returns, pay stubs, and W2s. Maybe the mortgage you’re applying for requires at least $60,000 in annual income, but you don’t show that amount on your tax return. You do have $5,000 in deposits per month coming into your bank accounts. The lender can qualify you based on that bank activity.

How Do You Apply for a Bank Statement Loan?

You will usually need to show 12 or 24 months of bank statements to qualify. This shows your lender that you have good cash flow over time, even if some months are higher than others.

The mortgage lender will usually want to check both your personal and business bank statements. The reason for checking business bank statements is to see where your money is going. If you have to pay monthly business rent, the lender will usually subtract that from your available cash since you wouldn’t be able to use that money to make mortgage payments without going out of business. If your tax return income was lower because of discretionary or one-time purchases, the lender might add that cash back since you could temporarily stop that spending if you needed to pay your mortgage.

What Additional Requirements Are There for a Bank Statement Home Loan?

If you’re trying to buy a home, one of the most important requirements is still going to be having a good credit score. The lender wants to see that you can responsibly make your payments on time. Your credit score is just as important as your deposits with a bank statement loan. That’s because the lender is already using an alternative way of verifying your income.

In addition, the lender will want proof that you’re actually in business. They don’t want to lend to people who set up other bank accounts and transfer money to inflate their income. You might need to show a business license or professional certification. If you don’t need one, the lender might ask for 1099s, invoices, or some other proof of self-employment.

What Are the Down Payment Requirements?

There is no set down payment requirements for bank statement loans. Some lenders will always want a higher down payment than a traditional mortgage. Others are more flexible depending on your income and credit.

Keep in mind that you are not applying for a traditional real estate loan. So if you’ve looked at things like FHA loans or first-time buyer programs, those down payment requirements generally won’t apply.

Do You Need to Show Proof of Assets?

Some lenders may ask for proof of assets. Again, this varies by lender. It also varies based on the loan you’re asking for and how well qualified you are.

Assets help mortgage lenders evaluate self-employed borrowers in two ways. First, they show you have the money you can rely on if business slows down. Second, building up assets proves that you can make financially responsible choices and aren’t simply wasting the cash you earn.

Is a Bank Statement Loan Always the Right Choice?

Which type of loan you use depends on your situation. Many self-employed borrowers can still qualify for traditional mortgage programs that may or may not have better rates, lower down payments, or other beneficial terms. It would be best if you looked at all of your mortgage options to see what’s best for you.

For example, let’s say you qualify for a conventional mortgage, but your taxable income is just barely above the minimum while your bank statement income is much higher. The traditional mortgage lender may evaluate your loan as riskier. That could increase your interest rate or down payment. Since you look better qualified to the bank statement loan lender, they might offer you better terms. Blake Mortgage connects you with a wide variety of mortgage options. Whether you’re worried about qualifying or want to make sure you’re getting the best deal, we can help. Give us a call or make an appointment to learn more.