Since 2001, more and more people have been saying no to traditional employment and becoming self-employed. Be it masonry, art, carpentry or filmmaking, more people than ever before own their own business and are working for themselves. While it is great for the economy, self-employed people can find it difficult to get mortgage loans due to the complexity and variability of their incomes. That’s why bank statement mortgage loans have become an easier alternative for freelancers and sole proprietors.
In this article, we will discuss everything there is to know about bank statement mortgage loans for self-employed individuals and how you can get one.
But first, let’s understand what these mortgage loans are.
What is a bank statement loan and why are they popular?
Bank statement mortgage loans are when a borrower presents bank statements for 12 to 24 months as opposed to verifying income with tax returns, W-2 forms and pay stubs. Bank statement mortgage loan programs are particularly suited to freelancers, borrowers with inconsistent income streams, and people who own their own businesses.
Since freelancers, sole proprietors and independent contractors are allowed to write off a lot of expenses on their taxes—such as internet expenses, home office deduction, phone expenses, business travel, and so on—their tax returns may not be an accurate representation of their earnings. A tax return may not show a lot of income for a self-employed borrower, and lenders may render the applicant ineligible for a conventional mortgage.
Another reason is that not all freelancers make a steady income. This inconsistency in the income stream makes it difficult to convince lenders of the borrower’s financial health and ability to repay the loan. Such mortgage lending criteria are problematic for self-employed borrowers.
That is the reason bank statement mortgage loans for self-employed borrowers have become more popular. These types of loans may be the only option available to them.
With an understanding of the borrower’s monthly cash flow based on their bank statements, lenders can make an informed decision as to whether or not the applicant can repay the loan.
What are the requirements to be eligible for bank statement mortgage loan programs?
It might be slightly more difficult for self-employed people to get loans, but as long as the mortgage applicant fulfills all the requirements, there’s no reason they can’t get approved.
Here are the documents you need to qualify for a bank statement mortgage loan program:
- Bank Statements for 12 to 24 months
- A Profit and Loss (P&L) statement for the borrower’s business prepared by a tax professional may sometimes be required.
Even if the borrower makes their income during certain time periods in a year, they have to maintain bank statements for all 24 months, and these bank statements have to provide a proper record of their deposits. The profit and loss statement will provide the required information about the borrower’s income and expenses and whether or not the earnings are in line with the borrower’s type of self-employment. The deposits have to be at least 5 percent of the stated revenue on the P&L statement for applicants to be eligible f
or bank statement mortgage loans.
How does the lender get an understanding of what the borrower’s earnings might be like? Well, based on the bank statements, the person’s bank deposits are averaged, which gives the lending party a close estimate of the applicant’s monthly income. Based on that estimate, applicants’ ability to pay back the loan amount is assessed, and then the lender decides whether or not the application is approved.
Apart from bank statements, there are some other standard requirements as follows:
Down Payment: A minimum down payment of 10 percent of the total loan value is needed, and the percentage increases to 20 percent depending on what your credit score is.
Credit Score: Most lenders require a minimum credit score of 580 to render someone eligible for a loan, while some others seem to be accepting a slightly higher minimum score.
Loan Amount: Most lenders provide up to $2 million except for a few who can loan up to $3 million.
DTI Ratio: With bank statement mortgage loans, the maximum debt-to-income ratio is 45 percent. Depending on how strong the other variables are, this value can go even higher on a client-by-client basis.
Interest Rate: Bank statement mortgage loan rates often start at 5.5 percent and can fluctuate depending on the down payment percentage and credit scores. If the credit scores are low and LTV ratios are high, the interest rate goes up, and vice versa.
Types of properties under bank statement mortgage loans
Borrowers can use bank statement mortgage loans to buy pretty much all kinds of homes such as:
- Single Family Homes
- Primary Residences
- Second Homes
- Vacation Homes
- Investment homes
Bank statement mortgage loans can be a great way, or the only way, for self-employed professionals to borrow funds to buy a property. But there are some crucial mistakes that borrowers need to avoid making to make sure they get issued a mortgage.
If you have bounced checks or overdrafts on your account, it gives lenders an impression that you may not be able to repay the loan. If, on the other hand, your bank statement shows multiple undocumented bank deposits, it prompts mortgage lenders to question if your funds are coming from an illegitimate source. Presence of other irregular and oddly suspicious activities in your account will surely ruin your chances of getting a loan. So, make sure your bank statements are free of any questionable activity before starting the approval process.
Don’t let anyone tell you that can’t get a mortgage if you are self employed. Apply your business experience towards purchasing a home by educating yourself on the process, paperwork, and resources needed to make it work.