Bank statement loans are the saving grace when it comes to home loan financing for self-employed borrowers. If you’re self-employed, you may feel like it’s impossible to get your first mortgage funded for your dream home because there are too many uncertainties with your career.
People like you, the self-employed borrower, are an interesting case for lenders like us. You’re independent and research-oriented, and take your time looking into the most profitable loan option for your future.
For those reasons, we wanted to create a “cheat sheet” of sorts for borrowers like you to sink their teeth into. Our complete guide on Bank Statement Loans aims to answer all the important questions and cover all the fundamentals for freelance financing options.
Who Should Get a Bank Statement Loan?
“The most common application for a bank statement loan in our experience would be independent general contractors, real estate investors, and freelancers,” says Efraim Oren (President of PMA).
The umbrella term of “self-employed” covers a wide range of employment outcomes and career paths. Many people who consider themselves self-employed have no idea how to classify themselves in their job title, so to get a better understanding of their position we’ve created a graph illustrating the various careers that would heavily benefit from a Bank Statement Loan down below:
If your income can’t be documented in a traditional sense, either by an annual salary or a typical 9-5 job then you’re more than qualified for a bank statement loan. For years, self-employed individuals have had to deal with a crazy financial challenge and a bank statement loan may finally be the answer they’ve been seeking.
The self-employed borrower’s challenges: using the net income claimed on their tax returns rather than the true net income that they make.
What does this mean?
The borrower's net income becomes inflated and inaccurate, and due to this the loan process becomes delayed and incomplete. Making them ineligible for a loan.
Bank Statement Loan Qualifications
Unlike other traditional loan options, bank statement loans allow you to apply for a home loan based on your bank statements instead of tax returns. Simple enough right…? Wrong!
Bank statement loans are considered non-QM (non-qualified) mortgages, meaning they aren’t backed by any institutional lending organization like Fannie Mae and Freddie Mac. Which in turn, means there is going to be less protection for lenders and borrowers during the process.
When you apply for a bank statement loan, you’ll have to provide the lender bank statements from the past year or two years depending on the property details. On top of this, it would be extremely beneficial if you provided information about your business and expenses to further simplify the process.
Angelina Lazatin, our senior loan processor specializing in bank statement loans, lists out the essential information needed to apply for a bank statement loan below.
“We would need a breakdown of the profits and loss statements for those given years, the type of business listed, and whether or not the business had a physical location. Answers to these questions would then decide the expense factors for the loan”.
We know that loan processes can seem complex. So, in an attempt to simplify things, here’s a list of some things you may need for a bank statement loan:
- Up to 2 years' history of self-employment
- (preferably) A credit score of over 660
- Enough cash or other funds to cover several (up to 4-5) months of your mortgage payments
- Business License
- Proof from an accountant (or another person who does your taxes) showing that your business expenses are legit and that you file your tax returns as an independent contractor
- Most lenders will require a down payment of up to 20% depending on market rates
- Loan amounts can span $150,000-$2,000,000
We wish we could provide you with the exact things needed for every lender, but it varies. Other lenders will request different types of documentation depending on their preferences. But we highly recommend checking our article on how to choose the right lender to make sure you’re going down the right path!
As most borrowers know, your credit score usually directly dictates the amount of down payment required to apply for a bank statement loan like many other traditional loan options. Typically, you can apply for a bank statement loan with a credit score as low as 600 (at least with PMA you can) but having a credit score of over 700 can get you amazingly better rates and terms.
You can calculate your loan terms and down payments with our Mortgage Calculator, we highly recommend using it during your research for the most profitable loan option.
In terms of interest rates, a bank statement loan tends to be on a higher interest rate trend than other conventional or traditional loan programs. Many real estate financing experts believe this to be the result of a bank statement loan being on the riskier side of loan programs.
Bank Statement Loan interest rates: 6.2-6.7%
Traditional home loan interest rates: 5-6%
Typically, bank statement loans may have slightly higher interest rates compared to traditional loans, as they are considered riskier due to the lack of traditional documentation. However, bank statement loans may still be a viable option for individuals who do not qualify for traditional loans or need funding quickly. In comparison, traditional loans are typically backed by more thorough documentation and have lower interest rates as a result. Additionally, traditional loans may have stricter requirements for credit scores, debt-to-income ratios, and other factors.
Of course, it depends on the private lender or institutional bank that you decide to do the program with, but finding the best interest rate for your bank statement loan is ideal when trying to create the most profitable option for you!
Where To Find Your Bank Statements
At this point, we hope you’ve done your research and come to the conclusion that a bank statement loan is the right financial option for you. If that’s the case, it’s time to learn how to get into your bank account and locate your bank statements.
Going through this step-by-step process to find your bank statements will simplify the process of getting a bank statement loan immensely.
Step 1: Contact the bank or credit union
You can either visit your bank in person to talk to a representative or go through their online process. Firstly, make sure to log in to your bank account.
Step 2: Locate Your Statements
On your bank's home screen, you should either see a tab labeled “documents” or “statements”. After clicking on that there could either be an additional step of locating a tab labeled “Account Details” or the statements could show up immediately.
Step 3: Download Your Statements
During this step, take into account that there could be many different statements depending on your specific financial situation. Make sure to document the correct statement and download a PDF version. Save the files somewhere that are easily accessible and name them something very easily understandable.
Loan Application Process for Bank Statement Loans
Once you've determined that a bank statement loan is the right option for you, understanding the loan application process becomes crucial. Here's a step-by-step guide to help you navigate through it smoothly:
Step 1: Pre-Qualification – Contact a lender specializing in bank statement loans to begin the pre-qualification process. Provide your basic financial information, including your credit score, income details, and desired loan amount. The lender will assess your eligibility and provide an estimate of the loan amount you may qualify for.
Step 2: Documentation Submission – Gather your bank statements, typically covering the past 12 to 24 months, and any additional documentation required by the lender. These may include tax returns, profit, and loss statements (for self-employed individuals), and identification documents. Ensure your statements are accurate and up-to-date.
Step 3: Underwriting – Submit your application, along with the required documentation, to the lender. Their underwriting team will carefully review your financial profile, assessing your income, debts, creditworthiness, and other factors. They may request further documentation or clarification during this stage.
Step 4: Appraisal and Title Search – The lender will order an appraisal of the property you intend to purchase or refinance to determine its market value. They will also conduct a title search to ensure there are no liens or legal issues associated with the property.
Step 5: Loan Approval and Closing – If your application meets the lender's criteria and the property appraisal is satisfactory, you will receive loan approval. Review the loan terms, interest rate, and closing costs provided by the lender. Once you're comfortable with the terms, proceed to the closing process, where you'll sign the loan documents, pay any required fees, and officially secure the bank statement loan.
Remember, working with an experienced loan officer can greatly simplify the application process and increase your chances of approval. Be prepared to respond promptly to any requests for additional information or documentation to keep the process moving smoothly.
Mortgage Regulations Cheat Sheet 2022
Navigating the complex landscape of mortgage regulations is crucial for anyone considering a bank statement loan in 2022.
Here's a concise cheat sheet of key mortgage regulations and changes that you should be aware of:
1. Qualified Mortgage (QM) Rule – The QM rule establishes the ability-to-repay requirement for mortgage lenders. It ensures borrowers have the financial means to repay their loans, reducing the risk of default. Compliance with the QM rule is crucial for lenders, and it may influence loan availability and underwriting criteria.
2. Fair Credit Reporting Act (FCRA) – The FCRA safeguards consumers' credit information and sets guidelines for credit reporting agencies. It grants you the right to access and dispute any inaccuracies in your credit reports. Regularly reviewing your credit reports is essential to ensure accuracy and identify any potential issues before applying for a bank statement loan.
3. TILA-RESPA Integrated Disclosure (TRID) Rule – The TRID rule consolidates the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). It aims to simplify the loan disclosure process, providing borrowers with transparent information about loan terms, costs, and risks. Familiarize yourself with the Loan Estimate and Closing Disclosure forms that lenders are required to provide.
4. Home Mortgage Disclosure Act (HMDA) – The HMDA requires certain lenders to collect and report data about mortgage loan applications, including information about the applicants, loan features, and outcomes. It promotes fair lending practices and enables regulatory agencies to monitor lending patterns and identify potential discrimination.
5. State-Specific Mortgage Regulations – Be aware that individual states may have their own mortgage regulations and licensing requirements. For example, if you're seeking a bank statement home loan in California, you'll need to comply with the state's specific regulations, such as those related to licensing, interest rates, or loan limits. Consult with a knowledgeable mortgage professional for guidance.
Staying informed about these regulations will help you better understand the mortgage process, your rights as a borrower, and the obligations of lenders. Remember to consult with a qualified mortgage professional or attorney for specific guidance tailored to your situation.
Bank Statement Loans Vs. Traditional Home Loans
If you haven’t understood the main point of this article yet, let me reinstate the most important thing here:
- A bank statement loan helps a self-employed borrower get a residential loan to either purchase the home they currently dream of living in or to expand their real estate residential investment portfolio using strictly bank statements.
Whereas, a traditional home loan program could go through a multitude of financial statements to qualify different borrowers for their loans.
Down below we illustrated the differences between a bank statement loan and alternative home loan solutions!
Conventional Loans: One of the more popular loan options due to their low downpayment requirements. These types of loans are available through virtually all mortgage lenders!
FHA Loan: Essentially the holy grail of home loans for first-time home buyers. This traditional loan program is so popular due to its flexible credit score requirements!
VA Loan: This one is for our service members! This loan option is ideal for all veterans and surviving spouses of veterans. These loan requirements are extremely beneficial compared to bank statement loans but do have a higher interest rate!
The Bottom Line
By understanding the fundamentals, the requirements, and the differences between a bank statement loan and other traditional home loans, self-employed borrowers like you can finally begin to create the most profitable loan option.
The fact of the matter is, many self-employed borrowers are eligible for other traditional loan programs depending on their different financial statements, and any professional mortgage lender would be able to truly help navigate you through these different program eligibilities (even with inconsistent income)!
Considering that bank statement loans are exceptionally risky, it’s important that you spend a considerable amount of time researching other loan options and use a bank statement loan only as a last resort after your research.
How is the debt-to-income ratio calculated by mortgage lenders?
DTI is calculated by dividing your total monthly debt payments by your monthly income. This number is used by lenders to measure your ability to take care of your monthly payments for repayment programs.
Why is getting a home loan if you are self-employed so difficult?
Most mortgage lenders tend to not work with self-employed individuals because of the increased risk and uncertainty behind their financial statements. It would require a more experienced lender to understand the circumstances.