No tax returns? no problem
Mortgage lenders need to verify your income before granting you a home loan. They usually do this by looking at the W2 tax forms.
That can be a problem when you're working for yourself. Business owners, freelancers, contractors, and seasonal or gig workers are unlikely to have the tax forms required for a traditional mortgage.
However, if you have a non-traditional income, you may be able to get a “bank statement mortgage”.
This means that you prove your income by providing regular deposits to your bank account for a year or two.
Find a Bank Statement Loan (July 23, 2021)
In this article (continue to …)
How Lenders Determine Your Income
There are certain steps to go through when buying or refinancing a home.
One step requires documentation of your income. This includes savings, retirement plans, fixed assets, and debts.
This can be a challenge for self-employed mortgage applicants. These people often have hard-to-document incomes and / or business expenses.
For example, a self-employed borrower can make $ 7,000 a month. But after business write-offs, their tax forms can show income as low as $ 5,000 per month.
This could cut their home purchase budget by more than $ 150,000.
Documented Monthly Income $ 7,000 $ 5,000 Qualified Monthly Mortgage Payment $ 2,020 $ 1,300 Qualified Home Purchase Budget$ 443,900$ 285,700
Loan Assumptions: The example assumes a 30-year fixed-rate mortgage with 3.75% interest and 10% discount on a house in Washington. Your own rate and monthly payments will be different
How to get a self-employed or freelance mortgage
So you are self-employed or have a sideline job. They have strong credit ratings and a solid financial track record. But you're struggling to qualify for a mortgage because you don't have traditional W2s to document your income.
Fortunately, a bank statement loan program can be an ideal solution.
Here we explain how a bank statement loan works and how to find out if you qualify for it.
Check your eligibility for a bank statement loan (07/23/2021)
What is a Bank Statement Mortgage Program?
A bank statement mortgage program allows you to verify your income on a mortgage application using documented bank deposits instead of tax forms.
Traditional mortgage loans use tax returns, W2s, and pay slips to check monthly income.
The higher your monthly income, the lower your debt-to-income ratio (DTI), and a lower DTI can warrant a higher loan amount.
But providing these traditional working papers will be impossible for people who do not have a full-time employer. Instead, mortgage applicants can opt for a bank statement loan program.
Using personal bank statements to qualify for a mortgage instead of W2s can be a good credit option if:
You don't have traditional tax records to verify your total incomeYou have tax records, but depreciation makes your income look smaller than it really is
In the past, reported income loans were a common mortgage solution for borrowers who were unable to document their full income. But tighter regulations in response to the mortgage crisis in the late 2000s have made reported income loans a thing of the past.
Today, bank statement loans have become more popular as they pose less risk to lenders. Borrowers no longer simply “declare” their income. For bank statement loans, applicants must document monthly deposits in order to qualify.
Who Should Get a Bank Statement Loan?
If you are a business owner or an independent contractor with no salary, qualifying for a traditional home loan can be difficult.
A bank statement loan program can help. This type of loan is typically used by:
Self-employed applicantsIndependent contractorsEmployees with seasonal incomeGig workers, part-time workers, or freelancersOther workers with irregular income
Self-employed applicants are the most common people to benefit from bank statement loans. But anyone who wants to go this route to buy a new home or refinance an existing loan can apply.
If you need to document your income but don't have pay slips and W2s, ask your mortgage broker or lender about underwriting based on personal bank statements.
You may find that getting a mortgage is easier than you expected.
Check your eligibility for a bank statement loan (07/23/2021)
Types of Bank Statement Loans
Different bank statement loan programs are available depending on the lender and your specific situation.
While most lenders require a minimum of 12 months of bank statements, some may ask for less. Remember that applicants who can submit 24 month bills may receive better rates and terms.
Additionally, some lenders may want you to use business statements instead of personal statements.
If you don't have business statements, you may still be able to use your personal statements with these lenders. However, you can use a smaller percentage of your deposits for qualifying purposes.
In some cases, borrowers may also be required to submit an income statement (P&L) for their business that has been prepared by a tax professional.
Disadvantages of bank statement loans
Fortunately for homeowners who cannot provide standard proof of income, bank statement loans are becoming more common.
However, these are still considered to be riskier than traditional mortgages. And that means there is a tradeoff between lenders and borrowers.
The tradeoff is usually in the form of a higher interest rate and a higher down payment requirement.
Bank statement loans typically have a higher interest rate and higher down payment requirements.
These additional costs offset the risk associated with not being able to report income using traditional methods.
The exact interest rate and down payment required for bank statement loans are usually based on credit ratings.
Remember that prices and terms vary widely depending on the company. Talk to more than one mortgage lender to see who has the lowest interest rates and the best terms on the loan you need.
Connect with Top Lenders Here (Jul 23, 2021)
How to find a mortgage on a bank statement
Bank statement mortgages are categorized as "Non-Qualifying Mortgages" (Non-QM) because they do not meet the credit standards set by Fannie Mae and Freddie Mac.
Because they are considered non-QM, not all lenders offer mortgages on bank statements. In fact, many banks and credit unions choose not to offer these types of loans.
You may have better luck with a mortgage loan-only company.
If you don't qualify for traditional mortgage financing, check with multiple lenders to see if they offer bank statement programs or other self-employed applicant programs.
Be sure to inquire about the lender's requirements for personal vs. business statements. You should also find out how many months it takes the lender to print the bank statements.
And don't forget to inquire about deposit requirements and interest rates.
Frequently asked questions about mortgage bank statement
How does a mortgage work on a bank statement?
Bank statement mortgage programs use your bank statements to document your income rather than relying on pay slips or W2s – forms that most self-employed borrowers don't have.
Are Bank Statement Mortgages Good?
A bank statement mortgage can be a good option if you are self-employed and your tax write-offs make your income appear much smaller than it really is. However, these loans have higher interest rates. Therefore, if you can qualify through one of these programs, it is usually best to stick with a compliant loan or a government supported loan.
How much down payment is required for a mortgage on a bank statement?
Since these are non-compliant loans, your lender may ask for a larger down payment, such as: B. 10 or 20 percent. Lenders may want to see a higher credit score than the 620 traditional loans typically require. In this sense, bank statement loans are similar to jumbo loans.
Can I use a bank statement loan for a second home?
Yes, this type of borrowing works for both primary and secondary residences, holiday homes, or investment properties.
Do bank statement loans work for refinancing?
Yes, bank statement loan programs work for refinancing loans, including cash-out refinancing for borrowers who have enough home equity to meet loan requirements.
Do Bank Statement Loans Work For FHA Loans?
No, FHA does not offer a bank statement loan. Instead, the lender can use tax certificates to verify two years of income for self-employed borrowers.
Do bank statement loans require PMI?
Yes, unless you drop 20 percent or more. If you cannot make a down payment of 20 percent, you can cancel the mortgage insurance later as soon as your mortgage lending value (LTV) reaches 80 percent or less.
My lender wants both bank statements and W2s. What's wrong?
It is common for lenders to ask for bank statements even when you are not using them to document a regular flow of income. If you're employed and using W2s and payrolls to show your income, your lender will likely only need two to three months of bank statements – not the 12 to 24 months it takes on a bank statement loan.
What are the mortgage rates today?
Are you independent? Do You Earn Seasonal Income? Are you a consultant, promoter, tax consultant, freelancer, artist or other professional with irregular income?
In that case, a bank statement loan program might be perfect for you.
Rates and down payment requirements vary from one lender to the next. It's always good to look for the lowest price.
You can get started right here.
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