How Bank Statement Mortgages Work
With bank statement mortgages, monthly bank statements are provided by the borrower instead of their pay stubs, W-2s, or income tax returns for verifying their monthly income. Typically, bank statement mortgages are used by borrowers who are self-employed, freelancers, business owners or those with inconsistent or seasonal income streams. In certain situations, borrowers may also be required to supply a profit and loss (P&L) statement for the business they own that a tax professional has prepared.
Bank statement mortgages are used by borrowers since they might not want or be able to provide the documents that are required for qualifying for a traditional mortgage. Most lenders, for example, require that you provide recent W-2s and pay stubs when you are applying for a mortgage. However, usually, self-employed borrowers are unable to provide those documents. Applicants who earn a good income even though they don’t receive regular payments are also good candidates for this type of program. Tax returns are not required by a majority of bank statement loans programs which for a number of reasons is appealing to certain borrowers. Briefly put, if your income experiences fluctuations, you run a business, are self-employed, or you would like to qualify for a mortgage without having to provide your tax returns, then a bank statement program might be the best option for you.
Although the program offers many borrowers with benefits, and different loan terms and qualification guidelines are applied compared to a standard mortgage. Keep reading to learn the way that a bank statement mortgages works and what documents you will be required to supply when you apply for this type of loan. It is also important to how the unique requirements for the program can affect the size of a loan that you can afford in addition to the mortgage rate on a bank statement loan that you will receive.
Bank Statement Mortgage Lenders
Traditional lenders provide bank statement mortgages such as mortgages brokers and mortgage banks and also private money lenders. The program is not offered by all lenders but many of them do. What we recommend you do is to shop with five lenders at least to find the very best loan terms. Get in touch with multiple lenders to determine whether or not they provide bank statement loans or other specific programs designed for self-employers borrowers. When you compare loan proposals and lenders it allows you to find the mortgage and program that will meet your needs the best.
Requirements of Bank Statement Mortgages
Bank statement mortgages are not classified as qualified mortgages (QM), and that means that lenders are able to set their own qualification guidelines for applicants rather than a uniform set of requirements being applied that all lenders use. Due to this, bank statement mortgages have borrower qualification requirements are more flexible compared to standard programs and might vary by lender. Lenders might ask borrowers from different documents or apply a different debt-to-income ratio or credit score guidelines. Other lenders might allow lower down payments. What we recommend is that borrowers contact several different bank lenders in order to find the one that meets their needs the best.
How Many Monthly Bank Statements Must Borrowers Provide?
Typically lenders require borrowers to supply twelve months worth of bank statements although there a number of lenders that require 12 monthly statements depending on a borrower’s credit, financial, and personal profile.
Are Borrowers Required to Supply Business Statements, Personal Statements or Both of These?
The answer will depend on the way your finances are organized and on the lender. For example, if you run a small business or are self-employed, and don’t maintain separate business and personal bank accounts, then a majority of lenders will require you to supply your bank statements (reflecting both your business and personal finances) for the past twelve months along with a business profit & loss (P&L) statement for the past twelve months that a licensed tax professional has prepared. Lenders will analyze your business P&L statement to ensure that it has reasonable costs and the business profit is consistent with the deposits recorded on your bank statements.
If you do maintain separate business and personal bank accounts, then you might be required to supply twelve monthly statements for both accounts. However, in certain situations, lenders will require fewer statements for a business account. However, in this scenario, a business P&L statement might not be required, although borrowers may choose to provide one with their application as additional support.
Borrowers might also have the option of providing jus a business P&L statement and business bank account statements for the previous twelve months. IN that case, the business profit on the P&L statement needs to be consistent with the deposits on the business bank account statements.
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For A Bank Statement Mortgage, How Is Gross Income Calculated?
Typically, lenders calculate your average monthly gross income over the specific time period that is based on your account deposits. As an example, if every two months you make deposits into your bank account that total $8,000, then your monthly gross income will be calculated as $4,000 ($8,000 x 6 deposits a year = $48,000/12 months = $4,000 average gross income per month).
This same approach is applied if you have seasonal or inconsistent bank account deposits. For example, if you just work three months out of the year and make three $20,000 deposits, then your monthly gross income will be calculated to be $5,000 ($20,000 x 3 deposits a year = $60,000/12 months = $50,000 in average gross monthly income). The monthly gross income amount is then used by the along with your monthly debt payments to calculate out how much you qualify for on a mortgage.
What if Your Bank Statements Show Overdraft or Non-Sufficient Funds (NSF) Events?
There might be overdraft or NSF events that show on your bank statements. Most lenders allow a maximum of three overdraft or NSF events in a twelve-month period. Borrowers might also be required to supply a letter explaining why the overdraft or NSF events occurred and what was done to address them.
For bank statement mortgages, the minimum credit score that is required will vary by lender. There are some lenders that offer their program to borrowers who have as low as 500 credit scores. Note that typically borrowers who have lower credit scores will pay a higher mortgage rate than a borrower with a high credit score.
Loan-to-Value (LTV) Ratio
The maximum LTV ratio, in a majority of cases, for bank statement mortgages is going to depend on what your credit score is. The higher that your credit score is, the higher the LTV ratio that will be allowed by a lender. For example, if a borrower has a 720 credit score or higher, they might be allowed to have a 90% maximum LTV ratio, whereas a borrower who has a credit score less than 580 with only be allowed a 65% ratio. The higher that your LTV ratio is, the higher the amount of loan you will qualify for relative to the property’s fair market value.
Guidelines do vary, however, many lenders do allow a 50% or greater debt-to-income ratio, depending on the borrower’s LTV ratio, consistency of income, credit profile, and other factors. The higher of a debt-to-income ratio that the lender applied, the higher mortgage amount you will qualify for. Note that although your business income can be used as the income component in your debt-to-income ratio, the debt component uses your personal debt expenses. For example, your business expenses will not be included, but the monthly payments on your student loans, cr, and personal credit cards will be counted as debt.
Borrower’s Reserve Requirements
There are many bank statement loan programs that will require you to have three-to-six months worth of reserves whenever your mortgage closes. Usually, reserves are required for higher-risk borrowers or mortgage programs so that an extra cushion is provided if any unexpected hardship or financial challenge arises after your loan has closed. This reserve requirement will be based on your total monthly housing expense, including your mortgage payment, homeowners insurance, property tax, and other applicable expenses. So, for example, if you have a $3,000 total monthly housing expense and you have a three-month reserve requirement, then you would be required to have $9,000 in savings at the time your loan closes. Not that reserves are not required by all lenders so before applying for a loan make sure you understand this guideline.
Typically, bank statement mortgages rates are 500% to 1.000% higher compared to standard mortgage interest rates. Like with all types of mortgages, your interest rate will vary depending on your LTV ratio, credit score, and other factors. There is a tendency for there to be more variation in mortgage rate prices on bank statement mortgages which means it is even more critical for borrowers to shop multiple lenders in order to get the best terms on their mortgage.
A majority of lenders offer both adjustable rate mortgage (ARM) and fixed rate mortgage loan program options on bank statement mortgages. Interest-only mortgages are offered by some lenders.