Bank Statement Loans
What Are Bank Statement Loans?
They’re a versatile financial tool designed to meet the specific needs of borrowers in the ever-changing 21st-century economy. They provide a path to homeownership that might not otherwise exist. They may be the home-buying solution you’ve been looking for.
Bank Statement Loans: The Basics
Typically, when a person applies for a traditional home loan, they submit tax returns and pay stubs to a mortgage professional. That professional uses the documents to help determine the would-be borrower’s ability to make payments on a mortgage. But that process wasn’t designed with the self-employed in mind; people who work for themselves rarely have pay stubs. And the self-employed often have tax deductions and write-offs that can present a skewed view of their income. Enter bank statement loans.
With non-QM bank statement loans, a mortgage professional uses 12 to 24 months’ worth of bank statements (business or personal) as the main criteria for determining eligibility. Other factors usually apply. Mortgage professionals often like to see credit scores of 660 or higher, low debt-to-income (DTI) ratios, and cash to cover a 10% down payment, with some cash reserves left over.
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What’s the difference between QM and non-QM loans?
Qualified mortgages (QM) follow a set of requirements laid out by the Consumer Financial Protection Bureau (CFPB), all under an umbrella rule of “ability to repay.” These CFPB requirements put restrictions on interest-only loans, balloon payments, negative amortization, and other common loan features. With “ability to repay” rules, a mortgage professional will almost certainly review the W-2s and the pay stubs of a potential borrower.
With non-qualified mortgages, the mortgage professional will generally review cash flow to determine a borrower’s ability to repay, analyzing the patterns of money going into bank accounts—the bank statements.
What are some other differences? Non-QM loans often allow for higher DTIs and may require higher down payments than QM loans. While QMs can be backed, insured, or guaranteed by the VA, the FHA, Freddie Mac, or Fannie Mae, non-QM loans are not.
How do bank statement loans work?
Normally, the would-be borrower gives their mortgage professional 12 or 24 months’ worth of bank statements from either a business or a personal account. The mortgage professional then may use these statements to calculate average monthly income and thus determine loan eligibility. In some cases, the mortgage professional might ask for additional information, such as credit card statements, the profit-and-loss statements of a business, or documentation on outstanding loans.
Who can benefit from bank statement loans?
The self-employed. Bank statement loans are tailor-made for people who aren’t drawing regular paychecks from an employer. This may include freelancers, small business owners, and others with fluctuating incomes. Contractors, gig workers, entrepreneurs, and real estate investors could face obstacles in qualifying for a conventional mortgage, making a bank statement loan an attractive option for them.
People with considerable assets. In some cases, a borrower may not have significant income earnings but perhaps does have assets, such as a large trust fund. Here, the money in that fund and other bank accounts could be used to help qualify for a mortgage loan.
Pros & Cons of Bank Statement Loans
The plus side of bank statement loans includes:
- Qualification. For many potential borrowers who can’t qualify for a mortgage using W-2s and pay stubs, a bank statement loan may be the best option.
- Credit score. While a good credit score matters in applying for any mortgage loan, the credit score requirements for bank statement loans can be more forgiving than those for other loan types. A borrower with a FICO score as low as 640 might qualify.
- Insurance. Unlike other mortgage loans, a bank statement loan may not require Private Mortgage Insurance (PMI). Which can be costly; while PMI usually ranges from 0.5% to 1.5% of the loan amount each year, it can go as high as 6%.
A few drawbacks of bank statement loans can include:
- Interest rates. While a variety of factors combine to determine the interest rate a borrower pays, bank statement loans can come with rates that are higher than those for conventional mortgages.
- Down payments. A VA loan can have no down payment. An FHA loan can have a down payment as low as 3%. A bank statement loan, however, usually requires a minimum down payment of 10%, and that can go higher depending on the situation.
Alternatives to Bank Statement Loans
Several mortgage products are good fits for people with non-traditional income. They include:
- A DSCR. Also known as an Investor Cash Flow loan, a DSCR (debt service coverage ratio) loan is designed for real estate investors looking to buy residential homes. Like a bank statement loan, a DSCR doesn’t necessarily rely on W-2s, pay stubs, or other personal income verification for qualification. Rather, with a DSCR, a mortgage professional will usually consider the potential income a property will generate.
- 1099 only. Another great option for the self-employed, a 1099 Only loan does just what it says: only considers a 1099. Freelancers, gig economy workers, independent contractors, and others can use their 1099 earnings statements instead of tax returns to qualify for a mortgage loan.
- No income loan. For borrowers with good credit and liquid assets, a no income loan may be the best path to home ownership. Here, a mortgage professional may consider liquid assets—such as cash, Treasury bills, and property—as collateral to show a borrower can repay the loan. No income loans may have higher down payment requirements, ranging from as low as 20% down to as high as 75%.
- CPA profit & loss. If you’ve got your own business, you’ve probably got an accountant. The profit-and-loss statements of that business, prepared by a certified public accountant (CPA), can be used to qualify for a loan. Mortgage professionals generally like to see between one and two years of statements.