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How a Bank Statement Mortgage Works

How a Bank Statement Mortgage Works

  • How a Bank Statement Mortgage Works
  • With a bank statement mortgage the borrower provides monthly bank statements instead of their tax returns, W-2s or pay stubs to verify their monthly income. Bank statement mortgages are typically used by self-employed borrowers, borrowers who own their own business, freelancers or borrowers with seasonal or inconsistent income streams. In some cases borrowers also may be required to provide a profit and loss (P&L) statement for their business prepared by a tax professional. 

    Borrowers use bank statement loans because they may not be able to or want to provide the documents required to qualify for a traditional mortgage. For example, most lenders require that you provide recent pay stubs and W-2s when you apply for a mortgage but self-employed borrowers usually cannot provide these documents. Additionally, applicants who do not receive a regular paycheck but who earn a sufficient income are good candidates for the program. Most bank statement mortgage programs do not require tax returns which is appealing to some borrowers for a variety of reasons.  In short, if you are self-employed, run a business, experience fluctuations in you income or want to qualify for a mortgage without providing your tax returns, a bank statement program may be right for you.  

    While the program offers benefits for many borrowers, it applies a different set of qualification guidelines and loan terms than a standard mortgage. Continue reading to learn how a bank statement mortgage works and the documents you are required to provide when you apply. Additionally, it is important to understand how the unique program requirements affect what size loan you can afford as well as the mortgage rate for a bank statement loan. 

  • Bank Statement Mortgage Lenders
  • Bank statement mortgages are provided by traditional lenders such as mortgage banks and mortgage brokers as well as private money lenders. Not all lenders offer the program but many do.  We recommend that you shop at least five lenders to find the best loan terms.  Contact multiple lenders in the table below to determine if they offer bank statement mortgages or other programs for self-employed borrowers.  Comparing lenders and loan proposals enables you to find the program and mortgage that best meet your needs.

  • Rate Details*
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    Points  More Info:
    Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
     
    Total Lender Fees:  
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    Monthly Housing Payments
    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
    Mortgage Insurance More Info
    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
    (Estimated)
    Property Tax More Info
    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
    (Estimated)
    Homeowner Insurance More Info
    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
    (Estimated)
    Homeowner Association Fee More Info
    Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
    (If Any)
    Total Monthly Housing Payments
    Lender Fees
    Points More Info
    Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Origination Fee More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
    Tax Service Fee More Info
    Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
    Processing Fee More Info
    Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
    Underwriting Fee More Info
    Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
    Wire Transfer Fee More Info
    Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
    (If Any)
    FHA Upfront Premium More Info
    FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
    (If any)
    VA funding Fee (If any)
    Flood Fee
    Other Fees More Info

    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

    Total Lender Fees
    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Mortgage Rates as of November 21, 2018
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
  • Bank Statement Mortgage Requirements
  • Bank statement mortgages are not categorized as qualified mortgages (QM) which means that lenders can apply their own qualification guidelines to applicants instead of applying a uniform set of requirements used by all lenders. Because of this, borrower qualification requirements for bank statement mortgages are more flexible than for standard programs and may vary by lender. For example, lenders may request different documents from borrowers or apply different credit score or debt-to-income ratio guidelines.  Other lenders may allow a lower down payment.  We recommend that borrowers contact multiple bank lenders to find the one that best meets their needs.

  • How Many Months of Bank Statements Are Borrowers Required to Provide?
  • Lenders typically require that borrowers provide twelve months of bank statements although many lenders require 24 months of statements depending on the borrower’s personal, financial and credit profile.

  • Are Borrowers Required to Provide Personal Statements, Business Statements or Both?
  • The answer to this question depends on the lenders and how your finances are organized. For example, if you are self-employed or run a small business and do not maintain separate personal and business bank accounts, most lenders require that you provide your bank statements (which reflect both your personal and business finances) for the prior twelve months as well as a profit & loss (P&L) statement for your business for the prior twelve months prepared by a licensed tax professional. Lenders analyze the business P&L statement to make sure that the costs are reasonable and that the profit for the business is consistent with the deposits reflected on the bank statements.

    If you maintain separate personal and business bank accounts, you may be required to provide twelve months of statements for both accounts, although in some cases lenders require a shorter history of statements for business accounts. Although a business P&L statement may not be required in this scenario borrowers may elect to provide one as additional support for their application.

    Borrowers may also have the option to provide only business account bank statements and a business P&L statement for the prior twelve months. In this case, the profit for the business on the P&L statement must be consistent with the deposits reflected on the statements for the business.

    Use our free personalized mortgage quote form to compare no obligation loan proposals from leading lenders.  Our quote form is easy-to-use, requires minimal personal information and does not impact your credit. Comparing multiple mortgage quotes is the best way to save money on your loan.

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  • How is Your Gross Income Calculated for a Bank Statement Mortgage?
  • Lenders typically calculate an average monthly gross income over the time period reviewed based on account deposits. For example, if you deposit $8,000 into your bank account every two months, your monthly gross income is calculated as $4,000 ($8,000 x 6 deposits per year = $48,000 / 12 months = $4,000 in average monthly gross income).

    The same approach applies if deposits into your bank account are inconsistent or seasonal. For example, if you only work three months a year and make three deposits of $20,000 into your bank account, your monthly gross income is calculated as $5,000 ($20,000 x 3 deposits per year = $60,000 / 12 months = $5,000 in average monthly gross income). The lender then uses this monthly gross income figure as well as your monthly debt payments to determine what size mortgage you qualify for.

  • CalculatorUse our MORTGAGE QUALIFICATION CALCULATOR to determine what size mortgage you can afford based on your monthly gross income
  • What if You Have Non-Sufficient Funds (NSF) or Overdraft Events on Your Statements?
  • Your bank statements may show NSF or overdraft events. Most lenders permit a maximum of three NSF or overdraft events during a twelve month period. Borrowers may also be required to provide a letter that explains why the NSF or overdraft events occurred and how they were addressed.

  • Credit Score
  • The minimum credit score required for a bank statement mortgage varies by lender. Some lenders offer the program to borrowers with credit scores as low as 500. Please note that borrowers with lower credit scores typically pay higher mortgage rates while borrowers with higher credit score pay lower mortgage rates.

  • Loan-to-Value (LTV) Ratio
  • In most cases, the maximum LTV ratio for a bank statement mortgage depends on your credit score. The higher your credit score, the higher the LTV ratio permitted by the lender. For example, a borrower with a credit score of 720 and above may be permitted a maximum LTV ratio of 90% while a borrower with a credit score below 580 may only be permitted a ratio of 65%. The higher your LTV ratio, the higher the loan amount you can qualify for relative to the fair market value of the property.

  • Debt-to-Income Ratio
  • Although guidelines vary, many lenders permit a debt-to-income ratio of 50% or greater, depending on the borrower’s credit profile, consistency of income, LTV ratio and other factors.  The higher the debt-to-income ratio applied by the lender, the higher the mortgage amount you qualify for.  Please note that while your business income may be used for the income component of your debt-to-income ratio, your personal debt expenses are used for the debt component.  For example, monthly payments for personal credit cards, car and student loans are counted as debt but your business expenses are not included.

  • Borrower Reserve Requirements
  • Many bank statement loan programs require that you hold three-to-six months of reserves when your mortgage closes.   Reserves are usually required for higher risk mortgage programs or borrowers to provide an extra cushion if an unexpected financial challenge or hardship arises after your loan closes.  The reserve requirement is based on total monthly housing expense which includes your mortgage payment, property tax, homeowners insurance and other applicable expenses. For example, if your total monthly housing expense is $3,000 and the reserve requirement is three months, you would be required to hold $9,000 as savings in reserve when your loan closes.  Please note that not all lenders require reserves so be sure to understand this guideline before you apply for the loan.   

  • Mortgage Rate
  • Bank statement mortgage rates are typically .500% to 1.000% higher than the interest rate for a standard mortgage. As with all mortgages, the interest rate varies depending on the your credit score, LTV ratio and other factors. There tends to be more variation in mortgage rate pricing for bank statement loans which makes it even more important that borrowers shop multiple lenders to find the best terms.

  • Types of Loan Programs
  • Most lenders offer fixed rate mortgage and adjustable rate mortgage (ARM) loan program options for bank statement mortgages and some lenders also offer interest only mortgages.

    Use the FREEandCLEAR Lender Directory to find lenders that offer bank statement mortgages and other programs for self-employed borrowers.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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