Bank Statement Loans: What you need to know
Are you self-employed but legally deduct and write off expenses to the point where you can’t get approved for a traditional mortgage? If you’ve been searching for a solution, look no more. Bank statement loans are here to help you buy a home or refinance your existing mortgage. These loans may also be called Stated Income loans or No Income loans which are true however these terms are looked down upon in the mortgage or lending industry. It starts with the real estate and refinance boom that started in the early 2000’s and ended with a melt down in 2009. When we went through the Great Recession of 2009, lawmakers came out with regulations making it impossible to lend the way we used to. Now in the early 2000’s our industry took it a bit too far by lending to buyers and homeowners who may have not been qualified to repay the loans they were borrowing. The Great Recession gave birth to a financial regulation law that passed which we all know by The Dodd-Frank Act. Although our good Senator’s created these laws mainly for the financial and investment industry, it affected the mortgage industry as well. The Dodd-Frank Act made it so that consumers would be protected. Some of the laws written in this act makes a Stated Income loan illegal or that if a consumer takes a loan, they must pass the Ability to Repay (ATR) test or the High Priced Mortgage Loan (HPML) test. These changes were great and fully protect consumers now and it has helped our industry maintain a very low default ratio. Although these laws made it illegal to write or create risky loans, new loans came out that gave certain people the opportunity to finance their homes. In particular, the Bank Statement loan has been a hit in helping these people that couldn’t get financing in a traditional setting.
The Bank Statement loan is a portfolio loan type which means it is not tied to the 10 year treasury bond like traditional loans are. Instead the interest rates are set by it’s investors and the rates are determined by how risky the loan is. If you have a high credit score and a large down payment, then you may be a AAA Credit borrower and will see rates starting at 3.75% as of January 2020. If you have a lower credit score such as 640 and want to use a standard 20% down payment, you can expect interest rates in the 5% range. These programs do come in 10% down however the interest rates aren’t favorable. Even with a minimum down payment of 10%, these loans have performed very well especially in the past 5 years. Interest rates have been going down on these programs year after year for about 3 years in a row. Compared to the old Stated Income loans that was said to cause the demise of the economy in 2009, these programs require large down payments which means buyers have more skin in the game and loan defaults are occurring far less than a Government FHA is. FHA loans only require a 3.5% down payment so you must imagine that when a homeowner who invests only 3.5% of the purchase price and they run into financial or personal issues, the home may not be a priority only because the investment was not great. On a bank statement program, investing 10% or 20% down makes a big impact on defaults because most people who invest these large amounts of money will do what it takes to protect their investment. They would rather sell their homes and get their cash out before the home would ever go into foreclosure.
Getting approved for a bank statement loan is quite easier than getting approved for a traditional loan. Here’s the bottom line. If you have been self employed for at least 2 years then you checked off the first requirement off the list. Next, if your business produces revenues with either a personal bank statement (for someone who may an Independent Contractor) or business bank statements (for someone who has a corporation) than you just fulfilled the second requirement to get approved. While we are talking about bank statements, how it works is your total customer deposits or revenues are added for the whole 12 month period and then divided by 12 months. This is your gross income which then would need to be divided by 2 and that would be your final net income that would be used to qualify you for a loan. The reason this is done is because lenders assume that half of your deposits are being used towards expenses and that you take home the other half as income. Lastly your credit scores will determine your interest rate. These programs offer the lowest rates for those that have at least a 720 credit score and have at least 20% down or in equity when refinancing.
Here at Equinox Home Financing, this is what we specialize in. Our business is built on helping home-buyers, homeowners, and real estate investors obtain financing that they couldn’t get at a bank or any other traditional lender. We have been offering these loans since 2015 and have a lot of experience. If you are self-employed and need help assessing if this program is for you, give us a call so we can help. You can call us at 1-888-505-8960 or you can fill out a form below and an agent will be calling you to discuss your options.