If you’re self-employed or a gig worker aspiring to own a home, a bank statement loan could be the solution you’ve been searching for. Unlike traditional mortgage options, a bank statement loan allows you to qualify based on your bank statements rather than tax returns. In this article, we will explore what bank statement loans are, how they work, and who would benefit the most from them.
What Is a Bank Statement Loan?
A bank statement loan, also known as a stated income loan, removes the need to provide typical financial documents like W-2s and tax returns when applying for a mortgage. Instead, you can use your bank statements to prove your income. This proves especially useful if your income is irregular, your employer doesn’t issue traditional paychecks, or you claim substantial tax deductions. Small business owners, doctors, lawyers, real estate agents, and investors are prime candidates for this type of loan.
According to Brad Seibel, head of Mortgage at Sage Mortgage, “Your bank statements, rather than your tax returns, would adequately show your income.” Bank statement loans are riskier than standard mortgages, making them less common among banks and mortgage lenders. These loans fall under the category of non-qualified mortgages (non-QM) because they lack the backing of Fannie Mae and Freddie Mac, thus offering less protection to both lenders and borrowers.
How Do Bank Statement Loans Work?
The application process for a bank statement loan differs slightly from that of a traditional mortgage, and qualifying for preapproval can be more challenging. To begin, you’ll need to provide the lender with bank statements dating back up to two years for both personal and business accounts. Additionally, you’ll disclose other relevant business and expense information, if applicable.
“The type of business, the number of employees, and whether the business has a physical location are some of the questions that bank statement lenders will want to know to decide the expense factor,” says Darrin Seppinni, president of HomeLife Mortgage, a lender specializing in bank statement loans. The lender will then analyze your income to determine your net income and preapprove you for a specific loan amount if you meet their other requirements.
While bank statement loans offer more flexibility, it’s important to note that they may come with prepayment penalties. Additionally, your credit score may influence the amount of down payment required. While a score as low as 620 can qualify you for a bank statement loan, a score of 700 or higher will yield better rates and terms.
Who Should Consider Bank Statement Mortgages?
Bank statement loans are ideal for self-employed individuals, entrepreneurs, freelancers, and gig workers. This also includes full-time real estate investors who can use revenue from their portfolio to qualify for a bank statement loan. Furthermore, if your income cannot be documented in a traditional manner, such as when employers pay workers through prepaid cards rather than direct deposit, a bank statement loan might be the right choice for you.
Where to Find Bank Statement Loans
If you’re not already working with a mortgage lender that offers bank statement loans, consider seeking the assistance of a mortgage broker. Brokers have partnerships with multiple wholesale lenders, providing them access to various types of mortgages and unique deals. The best part is that brokers typically don’t charge borrowers for their services. Instead, they receive compensation from the lender.
When comparing brokers, ensure they are licensed to work in your state and have experience with bank statement loans. In terms of loan options, carefully evaluate closing costs, APRs, and other fees to choose the most affordable loan.
Should You Consider a Bank Statement Loan?
While bank statement loans can be advantageous for those with income that isn’t adequately reflected in their tax returns, it’s crucial to weigh the downsides. Self-employed individuals and gig workers may still be eligible for traditional types of mortgages, even with inconsistent income. As Brad Seibel advises, “No one should ever get a bank statement loan if you actually have the income that qualifies for a traditional loan.” In other words, explore conventional loan options before considering a bank statement loan.
For more information on bank statement loans, visit ATICE.INFO.
Bank Statement Loans FAQ
- Is it hard to get a bank statement loan?
- How much income do you need for a bank statement loan?
- Can I provide additional documentation or letters of explanation to support a bank statement loan application?