Bank statement loans are harder to find
The home loan process is slightly different if you have a self-employed income.
Self-employed borrowers sometimes need to consider bank statement loans, which allow you to qualify based on bank statements rather than tax returns.
This is a great way to get approval for a loan if you don't have traditionally documentable income. But not all lenders offer bank statement mortgages – and finding a low mortgage rate can be more difficult.
There are still good offers for self-employed mortgage borrowers. You may have to look a little harder to find them.
Find a Bank Statement Loan (Feb 1, 2021)
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How to Find Bank Statement Loans
Not all lenders offer bank statement loans. Your options may therefore be narrower than those of a person applying for a “traditional” mortgage or refinancing.
Listed below are some mortgage lenders who specifically offer bank statement loans.
However, you shouldn't limit your search to just these companies.
A lender is welcome to approve credit applications based on bank statements – even if they don't advertise "bank statement loans" or "non-QM loans" on their website.
So if there is a mortgage lender that you are interested in, make sure to inquire about their loan requirements.
You are likely to have better luck with a non-bank mortgage lender or credit union. Well-known banks are generally less interested in offering non-QM products.
The wider your network, the more opportunities you have to compare loan terms and interest rates.
Just because you're self-employed doesn't mean you can't find a great mortgage business like everyone else.
Find a Cheap Bank Statement Loan (Feb 1, 2021)
A couple of lenders for bank statements
If you already have your eye on some mortgage lenders, ask if they can approve you based on your bank statements. As I said, not all lenders advertise this as an option.
If you're not sure where to look, we've compiled a list of lenders who specifically state that they approve bank statement loans.
As always, you should compare at least 3-5 loan offers to ensure you are getting the best terms and the lowest mortgage rate available.
Each self-employed mortgage lender is listed next to their Better Business Bureau (BBB) rating, which ranges from F to A +.
A&D Mortgage – A +Athas Capital Group – A +First National Bank of America – A +Griffin Funding – A +HomeLife Mortgage – A +Luxury Mortgage – A +New American funding – A +NewRez – A +North American Savings Bank – A +NorthStar funding – A +NP, Inc. – A +Paramount Residential Mortgage Group (PRMG) – A +Caliber home loan* – ONFidelity Home Group – ONMortgage Equity Partners – A.AmeriSave – B + sprout mortgage – B.
* Caliber Home Loans does not include any bank statement loans in its official portfolio. But at least one of his loan officers says he can bring them out
If none of those can help you, keep throwing your net. There are many other bank statement loan lenders that are not on our list.
Do your due diligence as a mortgage buyer
Understand that this is not a “best” mortgage lender list. Rather, it's a list of lenders who definitely issue bank statement loans – a starting point.
It is up to you to review the companies making your shortlist.
To find out how reputable a lender is, do an internet search for regulators and customer reviews.
The federal regulator, the Consumer Financial Protection Bureau, also maintains a consumer complaint database, which you can search by company name to see if official complaints have been filed.
Note that most companies have at least some complaints so this shouldn't be a deal breaker. But look at the reasons for the complaints to see if there are serious red flags.
Remember, you can always go away
Bank statement loans are a type of “unqualified” or “not QM” mortgage.
“Non-QM” means that a loan does not meet the “qualifying mortgage” standards for most traditional loans. Because bank statement loans don't use traditional income verification, they fall into this category.
Unqualified mortgages are less regulated than most other mortgage loan programs. So you don't get the consumer protection that applies to other types of credit.
That means you need to make sure that the lender you choose is reputable and that you fully understand the mortgage contract you are signing.
When in doubt about an issue, keep looking or seek professional advice.
Remember that a home loan agreement is not binding until you sign the final closing papers. So if at any point in the mortgage process something is wrong, you can always walk away.
What is a Bank Statement Loan?
Around 44 million Americans are self-employed, including freelancers and contract workers, according to a 2020 Gallup report.
So it's no wonder that there are special mortgage programs that the self-employed can use to buy a home or refinance their current home.
Bank statement loans are a popular option. No W2 or tax returns from previous years are required for these.
Instead, insurers check your monthly income by checking the deposits on your recent bank statements.
As a rule, you will need to provide bank statements for the last 12 to 24 months along with other supporting documents.
Pros and cons of bank statement loans
Many business owners, contract workers, and others in the gig economy minimize their tax liabilities by maximizing their deductibles for business expenses.
These write-offs can make your income look much smaller than it really is.
Some self-employed mortgage borrowers use bank statement loans to circumvent this obstacle by counting most or all of their income and ignoring expenses.
Bank statement loans come in different varieties. We have found independent mortgage lenders who offer:
30 Year Fixed Rate Mortgages 5/1 Adjustable Rate Mortgages (ARMs) 7/1 and 10/1 ARMs Jumbo loans with credit limits in the millions
As an added benefit, many bank statement loans do not require mortgage insurance.
Since non-QM loans can't be sold to Fannie Mae or Freddie Mac, lenders don't have to charge for the private mortgage insurance (borrower-paid) that so many home buyers try to avoid.
Disadvantages of bank statement loans
Non-QM loans are not regulated like other mortgage programs. This means that each lender will set their own criteria or “underwriting standards” for approving these loans.
And the interest rates on these mortgages are usually higher. So you should expect that you will have to shop more than usual for a good deal.
Don't be put off if one or more lenders turn you down. Keep searching, and you may find one who is happy to help.
Some experts recommend that you find at least five independent mortgage lenders to choose from and then compare their offers side by side.
Do you need a bank statement mortgage?
As a self-employed borrower, you don't need to use a bank statement mortgage.
You have the option to apply for mainstream loan programs like everyone else, including conventional loans, FHA, VA, and USDA loans.
These large loan programs may be easier to qualify and typically offer lower interest rates than non-QM mortgages.
However, you need to check income against your tax returns, not your bank statements. This could reduce your “qualified” income as you will have to use your after-expense income for the year.
Many self-employed people write off most of their income in expenses. A great strategy for paying less tax but not getting a mortgage.
$ 100,000 gross income $ 60,000 claimed expense on tax returns $ 40,000 in taxable income and the only portion that can be used to qualify for mortgages
Depreciation can weigh heavily on your income as a lender sees it. However, if the lower amount qualifies you, a traditional program will get you a better deal on your mortgage.
Think about your buying or refinancing goals: Do you want the lowest interest rate? The largest loan amount? The cheapest monthly payment?
Knowing your goals can help you compare options and find the best loan program for you.
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Mortgage Requirements for Bank Statements
Since these are unqualified mortgages, each lender must have their own set of rules. And sometimes a lender adjusts the rules that apply to the applicant.
For example, a lender can typically only ask for a 12 month bank statement. However, if you are borderline in any way (you may have a low credit score), you may be asked for statements dating back 24 months. Others want a two-year bank statement for all uses.
The following general requirements are just a rough guide of what you may need to qualify as a self-employed mortgage borrower:
Bank statements – Usually for the past 12 or 24 monthsA worthwhile deposit – Often 10% of the purchase price or moreCash reserves – Enough savings or readily available assets to cover months of mortgage payments. Expect to need to document thisA decent credit score and a clean credit report – Some lenders will approve FICO scores as low as 580, but you will likely need a score of 620 or higher. And remember, the higher your credit score, the lower your rate is likely to beA debt-to-income ratio (DTI) below 55% – Many non-QM mortgage lenders have lower DTI requirements than those providing compliant loansAn income statement (Profit and loss account) – Usually for the last 12 trading months of your company, prepared by your licensed tax advisor. Most often required when mixing your personal and professional financesA business license – Only if one is required in your industry
You will also need a letter from your accountant or a licensed tax professional confirming that you are filing your taxes in an appropriate self-employed category. He or she may also need to confirm that your deductibles are okay.
Don't be put off if you suspect you might be missing one or two of these. Some lenders are more flexible than others.
Bank statement loan interest rates
Bank statement loan interest rates are higher than traditional mortgage rates because non-QM loans are seen as a greater risk.
For entrepreneurs and many in the gig economy (those most likely to opt for bank statement loans), financial life can be precarious.
So lenders must expect more loans to go bad. The only way to cover this additional risk is to charge higher interest rates.
Each lender assesses risk in their own way. It is therefore difficult to come up with a useful average for the actual higher statement rates.
However, when we sampled some bank statement loans on the day this was written, we found a number that states interest rates around 4.5% on a 30 year fixed rate mortgage (FRM).
Compare that to an average rate of 2.8% for 30-year-old mainstream FRMs on the same day. Bank statement mortgage rates were almost 2% higher.
That doesn't mean you can't find a lot. But it should emphasize the importance of shopping for your best deal.
You may see a wide variety in the interest rates on offer and you want to be sure that you are getting the cheapest loan that you can.
How to choose the best mortgage lender for you
Mortgage professionals and financial advisors keep asking mortgage seekers to compare their loans. And they are right.
Borrowers can easily save thousands or tens of thousands of dollars over the life of their loans by simply spending a few hours soliciting and comparing quotes from multiple lenders.
These quotes come in the form of "credit estimates". And they all have the same format. So they can be compared very easily side by side.
You are obviously looking for a low mortgage rate. However, don't forget to also compare the following information included in each quote:
Annual percentage (APR) – This is a better guide to the real cost of a loan than a raw mortgage rate. It includes the total loan costs spread over the life of your mortgageEstimated closing costs – How much will you pay in loan costs?Estimated cash at the end – The amount you need on the final day: closing costs plus down payment and other liabilitiesThe total amount you paid after five years – A great way to compare the initial cost of two different loansThe amount by which you reduced your debt (the "principal" you paid back) after five years – A key indicator of value for money
This is vital stuff. And it is your opportunity to choose the loan that suits you best.
Remember, you are likely to see a wider variety of loan types, loan terms, and interest rates from bank statement mortgage lenders. So it is really in your own best interest to spend some time shopping.
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