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Guide to Bank Statement Loans | The bank rate

If you’re self-employed or a gig worker looking to buy a home, a bank statement loan could help. With a bank statement loan, you qualify for a mortgage based on 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 need to provide your lender with some of the typical financial documents needed for a mortgage loan, such as W-2 forms and statements. of income. Instead, you’ll use bank statements to prove your income. This can be useful if your income is inconsistent, your employer doesn’t issue traditional paychecks, or you claim large tax deductions. This may apply if you are a doctor, lawyer or real estate agent, for example.

“For example, if your tax returns show you made $100,000 last year when you really made $200,000 because you were able to deduct an expensive printing machine you bought,” says Brad Seibel, Head of Mortgages at Sage Mortgage. “Your bank statements, rather than your tax returns, would adequately show your income.” (Editor’s note: Sage Mortgage is owned by Bankrate’s parent company, Red Ventures.)

However, bank statement loans are considered riskier and many banks and mortgage companies do not offer them. This is because they are non-qualified (non-QM) mortgages, which means they are not guaranteed by Fannie Mae and Freddie Mac, so there is less protection for lenders and borrowers. .

How do bank statement loans work?

The application process for a bank statement loan differs from that of a traditional mortgage loan. When applying, you will provide the lender’s bank statements for the past year or two, instead of the past two or three months, along with information about your business (such as profit and loss statements) and your expenses. If you have personal and business accounts, you will need to provide statements for both.

“The type of business, number of employees and whether the business has a physical location are some of the questions bank statement lenders will want to know when deciding on the expense factor,” says Darrin Seppinni, president of HomeLife Mortgage, a California company. lender specializing in bank statement loans.

Although bank statement loans offer greater flexibility, they have drawbacks. These mortgages usually carry a higher interest rate and it is not uncommon for them to have a prepayment penalty. (If you plan to refinance the loan in the future, this penalty could throw a wrench in those plans.)

Depending on your credit score, you may also need to put down a larger down payment. Typically, you can qualify for a bank statement loan with a score as low as 620, but a 700 or higher gets you a better rate and better terms. A borrower working with HomeLife Mortgage who has a credit score of 640, for example, might have to put down a 20% down payment, while a borrower with a score of 660 might get away with 15%.

Who Are Candidates for Bank Statement Mortgages?

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

This often includes full-time real estate investors, who qualify for bank statement loans based on their portfolio income.

You can also consider a bank statement loan if your income cannot be documented in the traditional way. For example, some employers pay workers via prepaid cards instead of direct deposits.

How to find a bank statement loan

If you don’t already work with a mortgage lender that offers bank statement loans, a mortgage broker may be able to help you find one. A broker often has partnerships with multiple wholesale lenders, giving them access to a variety of unique types of mortgages and offers. Brokers generally don’t charge borrowers for their services – instead they charge the lender, who then passes the cost on to you in the form of a fee or a higher rate. When comparing brokers, make sure anyone on your shortlist is licensed to work in your state and has experience with bank statement loans.

Alternatives to Bank Statement Loans

  • Conventional loans: Conventional loans are available from virtually all mortgage lenders. They tend to offer much better interest rates and terms than bank statement loans. Simply put, “if you have pay stubs, it’s a much better deal to submit pay stubs,” says Seibel.
  • FHA Loans: FHA loans are particularly popular among first-time home buyers due to their flexible qualification criteria.
  • VA Loans: Eligible military members, veterans, and surviving spouses can get a VA-backed mortgage with no down payment.
  • Asset depletion loans: If you have no income but significant assets, a lender may be able to use those assets to qualify you for a mortgage. These types of loans are expensive, however – it might make more sense to sell some assets to get the funds needed to buy a house.
  • 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 cash flow and how it relates to your ability to pay the mortgage. Keep in mind that when calculating DSCR, lenders tend to be conservative and factor in higher expenses and vacancy.
  • Interest-only loans: You will only pay interest for the first few years of the loan term, then you will pay principal and interest. This keeps your costs low for a while, but you also won’t be building equity during the introductory period, and you may not be able to pay principal and interest payments once they come in. in force.
  • Loans in portfolio: When a lender issues a portfolio loan, they keep that loan in their portfolio instead of offloading it to the secondary mortgage market. For this reason, these types of loans have more flexible qualification standards. However, they are not always advertised and are usually reserved for high value customers or those who already have a relationship with the lender. If you are an investor, consider maintaining your bank accounts with a portfolio lender. It can give you a boost when you need a mortgage.

Is a bank statement mortgage right for you?

A bank statement loan could be to your advantage if your tax returns do not accurately reflect your income. The fact is, however, that many self-employed people are eligible for other, more traditional types of mortgages, even with irregular incomes. Since bank statement loans have considerable drawbacks, it is essential to carefully consider all options.

“Nobody should ever get a bank statement loan if you actually have the income that qualifies for a traditional loan,” says Seibel.

The bottom line: Try a conventional loan first.