Bank statement loan programs took over the traditional stated income loans. While we did not see any alternatives for people that were unable to verify their income the traditional way for a while, there are programs available now. The most common name for the program is the Bank Statement Loan and as the name suggests, you verify your income with bank statements rather than paystubs or tax returns.
Because you do not verify your income the traditional way, these loans cannot be conventional because they do not meet the Qualified Mortgage Guidelines. However, many banks, big and small, have begun to offer these programs for borrowers that have good credit yet do not have standard income.
The Self-Employed Borrower
The most common borrower that benefits from the Bank Statement Loan programs is the self-employed borrower. This borrower makes an income but cannot verify it with paystubs. Sure, he could provide his tax returns, but because lenders use the net income you claim on your tax returns rather than the true net income that you make, it makes many borrowers ineligible for a loan.
Bank statement loans put an end to this problem. They enable the self-employed borrower to provide the bank with 12 months of bank statements that show the regular receipt of income. This gives the lender an idea of what you can afford. They still need to see the expenses you incur as a result of owning a business, but they do not penalize you for the things you write off on your taxes. It is common practice to write off as much as possible on your tax returns in order to minimize your tax liability. Oftentimes, this bottom line is not a true reflection of your income, though, so it can hurt you when you apply for a mortgage later on down the road.
If you want to use bank statement programs, you need to make sure that the remaining portions of your application are attractive. This means that you have a good or excellent credit score; have plenty of reserves (money available to pay your mortgage payment if your income fell through) and you have a decent down payment on the home. If you need to refinance with a bank statement loan, the lower your loan-to-value ratio, the better off you are when it comes to getting approved.
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Seasonal Employees
Even if you are an employee of some sort, but your work is seasonal, you could be a good candidate for Bank Statement Loan programs. Typically, seasonal employees do not have enough money to equal out over the entire year. For example, let’s say you work 6 months out of the year at your seasonal job. The other six months you either do not work or have odd jobs here and there. A conventional lender will take your 6-month income and annualize it, which means divide it by 12 months rather than 6 months. That will obviously make your gross monthly income much smaller and near impossible to qualify for a loan because of the high debt ratio it causes.
With Bank Statement loan programs, you can document your income with your bank statements. The key factor is that you need to hold the seasonal job for at least two years in order to use the income. The lender will still annualize the income, but can use any other income you bring in as well, as long as you can document the receipt of the income on a regular basis with your bank statements.
Commissioned Employees
Another group of employees that benefits from bank statement loans are commissioned employees. Commission is usually not a very regular receipt of income. One month you might receive a large amount of money and the next month you receive next to nothing. The lender can annualize this income; however, conventional lenders usually need to see your tax returns in order to calculate your income. If you work for someone on a commission basis, chances are you have many write-offs that pertain to your job. This decreases the total amount of income you can use to qualify for the loan. If you use bank statements to prove your income, the lender will deduct fewer expenses from your income, which gives you a better chance at an approval for the loan.
Borrowers Living off of Assets
There are some borrowers that do not need to work, yet they could benefit from a mortgage. Without a job, it is difficult to get approved for any type of loan. The Bank Statement Loan, however, might work for you. If you can prove that you have a steady stream of income from some other source, such as a pension, social security, or even investments, you can use the income to qualify for a mortgage. You will have to prove that you have at least 3 years’ worth of income coming up and that the likelihood of receipt of the income is very high in order to qualify, but it is a great source for borrowers living off of assets.
Keep in mind, no matter the reason you need Bank Statement Loan programs that the terms will vary. This is not a conventional program and it does not abide by the Qualified Mortgage Rules, which means lenders can charge more on these loans and they can vary the terms. When you apply for this type of loan, make sure you apply with several lenders and compare the offers. Typically, private lenders offer the best terms, but shopping with larger lenders is not a bad idea as well, just to see what they offer.
Bank Statement Loans are a great way to get the loan you need to purchase or refinance. Even though the days of stated income are gone does not mean there are not alternatives out there. In fact, these loans are considered “Alternative Documentation” loans. If you have the bank statements to prove receipt of income and limited expenses, you have a good chance of getting approved for this type of loan.