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 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.
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.
Lenders typically require that borrowers provide twelve months of bank statements although many lenders require 24 months of statements depending on the borrower‚Äôs personal, financial and credit profile. You may be able to qualify for better loan terms, including a lower mortgage rate, if you provide 24 months of statements instead of twelve.
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 personal 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 only require three months 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.
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If you deposit money from your job or business directly into your personal bank account, lenders typically use 50% to 85% of the deposit amount to calculate your monthly gross income, which is used to determine the mortgage you can afford. For example, if you are self-employed and deposit $5,000 directly into your personal account every month, the lender uses $2,500 to $4,250 (50% to 85% of the deposit) in monthly gross income for your loan application. It is important to determine the specific discount the lender applies to deposits made into a personal bank account before you apply for the mortgage.
If you regularly transfer funds from a separate business bank account into your personal bank account, lenders typically use the full amount of those deposits to determine the loan you qualify for. In this scenario, if you transfer or deposit $5,000 from your business bank account to your personal account on a monthly basis, the lender uses the full $5,000 in monthly gross income to calculate your mortgage amount.
With both approaches, lenders typically calculate an average monthly gross income over the time period reviewed. For example, if you transfer $8,000 into your personal bank account from your business 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). As noted above, if you deposit the money you earn directly into your personal bank account instead of transferring it from a business account, the lender applies a 15% to 50% discount to your income.
The same approach applies if your deposits are inconsistent or seasonal. For example, if you only work three months a year and make three $20,000 transfers into your personal bank account from your business account, your average monthly gross income is calculated as $5,000 ($20,000 x 3 deposits per year = $60,000 / 12 months = $5,000). The lender uses this monthly gross income figure as well as your monthly debt payments to determine what size mortgage you qualify for.
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.
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.
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.
Although guidelines vary, many lenders permit a debt-to-income ratio of 50% or greater, depending on the borrower‚Äôs 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.
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.
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. Additionally, as noted above, you may be required to pay a higher interest rate if you only provide statements for twelve months instead of 24. Also, there tends to be more variation in mortgage rate pricing for bank statement loans which makes it even more important that you shop multiple lenders to find the best terms.
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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