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Bank Statement Loans
Bank statement loans represent a type of non-qualified mortgage loan that assesses eligibility based on bank statements instead of tax returns. Prospective borrowers are typically required by the lender to furnish several months' worth of bank statements to demonstrate their capacity to repay the loan. This avenue facilitates access to home loans for self-employed individuals and those with lower income, particularly when their tax filings do not fully reflect their earnings.
Bank statement mortgage programs serve as a viable alternative for self-employed individuals, business owners, and retirees seeking alternative income verification methods. Assess whether a bank statement home loan from Fyzl Group aligns with your financial needs and circumstances..
What is it?
Liquid assets, such as those held in checking accounts, savings accounts, certificates of deposit (CDs), money market accounts, mutual funds, stocks, and bonds, are utilized as collateral for loans. In some instances, high-net-worth individuals may rely solely on asset statements for qualification.
Importantly, the assets pledged for the loan must be readily convertible into cash.
For retirees, assets deemed eligible as income encompass bank accounts (checking or savings), CDs (certificates of deposit), investment accounts (stocks, bonds, and mutual funds), and money market accounts.
Who Can Benefit?
Business owners, Freelance employees, Consultants, Contract workers, Independent contractors, Sole proprietors, Gig economy workers, Realtors, Entrepreneurs, Retirees
These loan options offer a solution to the challenge faced by borrowers who rely on the net income reported in their tax returns, which may not accurately reflect their actual earnings. This discrepancy often renders many borrowers ineligible for traditional loans. With a bank statement loan, self-employed individuals can submit as little as 12 months' worth of bank statements to the mortgage lender, showcasing consistent deposits. This allows the lender to assess the borrower's borrowing capacity effectively. The lender then verifies the bank statements either by contacting the bank directly or by completing a verification of deposit (VOD) request and forwarding it to the bank via mail or fax. If utilizing business bank statements for qualification, the lender still requires insight into business-related expenses but does not penalize borrowers for expenses written off on their tax returns.
Are You Eligible?
You must have been a business owner or self-employed for at least two years (one year allowed with two years of experience in the same line of work)
You must have at least 10% down (90% loan to value, w/ a 720+ credit score),
You must have at least 15% down (85% loan to value w/ a 700+ credit score
You must have at least 20% down (80% loan to value w/ a 660+ credit score)
You must have at least 25% down (75% loan to value w/ a 620+ credit score)
You must have three months of PITI reserves in the bank for loan amounts under $1 million and six months for loan amounts over $1 million. Twelve months of PITI reserves are required on loans over $1.5 million.
You may qualify with as little as 12 months of bank statement deposits.
You must have a credit score of 620 or above to qualify.
The minimum loan amount is $100,000, and the maximum loan is $5,000,000.
The Benefits
Qualifying with Bank Statements: One of the primary advantages of this financing method is the ability to use 12 or 24-month bank statements instead of pay stubs or tax returns for qualification. This simplifies the process for small business owners and self-employed individuals seeking home financing, as both business and personal bank statements are acceptable.
No Tax Returns Required: Lenders conducting underwriting for bank statement loans do not necessarily need to review your tax returns. This acknowledges that tax records may not always provide an accurate reflection of your actual income.
Low Down Payment Options: Bank statement loans offer the opportunity to secure financing with a minimum down payment as low as 10%.
Cash-Out Refinance Opportunities: Through cash-out refinance loans, borrowers can access funds for significant expenses such as major purchases, home improvements, or emergencies, with the ability to leverage up to 80% of the property's value.
High Loan Amounts: Bank statement loans allow for loan amounts of up to $5 million, providing the flexibility to explore a broader range of properties, including high-value purchases.
Flexible DTI Ratios: Bank statement loans accommodate debt-to-income (DTI) ratios of up to 50%, making it easier for borrowers to qualify.
Variety of Rate Options: Borrowers can choose between fixed-rate and adjustable-rate bank statement loans based on their preferences and financial goals.
Interest-Only Payment Option: Fyzl Group offers the option to structure bank statement loans with interest-only payments for a predetermined period, providing additional financial flexibility for borrowers.
The Drawbacks
Similar to any other financing choice, bank statement loans come with drawbacks that should be carefully considered before applying. Here are some of the most notable disadvantages:
Requirement for Self-Employment History: Self-employed individuals must demonstrate a minimum of two years of self-employment to qualify for bank statement loans. If this milestone hasn't been met, applicants may need to wait. Exceptions are possible for business owners with at least one year of business operation experience, provided they have a minimum of two years of experience in the same field.
Potential for Higher Interest Rates: Bank statement loans may involve higher interest rates and down payments compared to traditional loan options, although this varies based on individual credit scores and overall financial situations. However, Fyzl Group endeavors to secure competitive interest rates for its clients.
Limited Regulation: As bank statement loans fall under the category of non-qualified mortgages (non-QM), they are not subject to the same level of regulation as traditional mortgages. Consequently, mortgage lenders have more discretion in setting eligibility criteria.
Requirements For A Bank Statement Loan
To qualify for a bank statement loan, eligibility hinges on calculating the net sum of eligible deposits after subtracting disallowed ones. This resulting figure is then divided by the number of bank statements provided, whether spanning a 12 or 24-month period.
Another option involves a blended approach, particularly if the co-borrower holds W2 employee status. This entails combining W2 and tax return income from the co-borrower with bank statement income from the primary borrower, or utilizing assets from the co-borrower alongside bank statements from the primary borrower. Non-QM loans afford the flexibility to incorporate various sources of blended incomes for qualification.
Disallowed deposits in the context of a bank statement loan typically include transfers between bank accounts and significant cash deposits. These transactions may prompt concerns and require a letter of explanation.
Special Considerations for Bank Statement Loans
You are allowed to utilize statements from multiple bank accounts, but they must not include a mixture of personal and business accounts.
Deposits transferred from a business account to a personal account are deemed acceptable.
Combining W2 income with bank statement income is permissible, provided there is no duplication of income.
Avoid mixing funds from different sources.
Foreign bank statements and assets may be considered but must be translated into English.
You can count 100% of your personal bank statement deposits as income and up to 50% of your business bank statement deposits (depending on your business type, you may be eligible to use more than 50% of the deposits)
How are Bank Statement Loans Calculated?
Now that you've learned about bank statement loans, you might be curious about how lenders utilize your bank statements to assess your income.
These loans are particularly beneficial for self-employed individuals, business owners, entrepreneurs, and investors who lack traditional income sources and pay stubs. Since these borrowers often claim deductions on their taxes, their tax returns may not accurately reflect their actual income and repayment capability.
With a bank statement loan, you can showcase your repayment ability using your bank statements. But how exactly do bank statement loans function?
During the application process for a bank statement loan, an underwriter will calculate your eligible income by totaling the deposits in your bank accounts over 12 or 24 months and then dividing that sum by 12 or 24 to determine your average monthly income.
Self-employed borrowers typically have the option to use either 12 or 24 months' worth of bank statements, but certain criteria must be met. For example, lenders prefer to see a minimum of two years of self-employment history, or one year if the individual has remained in the same industry or role.
Moreover, the deposits considered for calculating your income for a home loan depend on how you pay yourself. For instance, if you transfer funds from a business account to a personal account, lenders may utilize around 50% of these deposits to determine your income. However, if the funds are moved directly from a business account to a personal account, lenders might permit 100% of the deposits to qualify for the loan.
Furthermore, it's not necessary to have monthly deposits; seasonal income is also considered. For instance, if you earn $100,000 in just three months, lenders will divide that amount by 12 (the number of months in a year) to establish your average monthly income.
As long as your deposits demonstrate that you earn enough to cover your monthly loan balance, your income will support your qualification for a bank statement loan. If you're uncertain whether your bank statement deposits are sufficient to qualify as income, you can utilize a bank statement loan calculator or consult with a loan specialist before applying for a mortgage.
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