If you are a smart borrower, you will shop around for your mortgage. There are many lenders that offer bank statement loans, but not all programs are created equal. How do you know which one is right for you? It is important to understand how to compare the terms, rates, and programs offered so that you know what you are getting yourself into. Today, you can rest assured that banks are much more likely to ensure that you understand the program so you do not default in the future, but being educated ahead of time can only make the situation better for you.
What are the Terms?
Because bank statement loans are not a part of the Qualified Mortgage guidelines, lenders have a bit more leniency in what they can do with them. Most lenders keep these loans on their own books, which mean the risk is theirs and they get to charge what they want, for the most part. They still have to abide by the Ability to Repay Rule, which means they did their due diligence to ensure that you can afford the loan, but beyond that, the lender is on their own. This means you need to understand the terms very well. Ask some of the following questions:
- Is the product fixed rate or adjustable?
- What is the amortization period?
- What LTVs are allowed?
- What is the rate?
These questions will get you started and will help you see that each loan has different terms. For example, you cannot effectively compare a loan with a 30-year term with a loan that has a 20-year term, even if the rates are the same. This is also true for fixed rate versus adjustable rate loans; adjustable rates will likely increase in a few years, which gives you a different payment in the long-term and could be a game changer for you in terms of affording the loan.
What Down Payment is Required?
A big difference from lender to lender is the amount of the down payment required. Some lenders require 24 months of bank statements, but they allow up to an 80 percent loan-to-value ratio, which means you only have to put down 20 percent. Other lenders will only require 12 months of bank statements, but will only offer an LTV up to 70 percent, which means you must put 30 percent down. This could be a decision maker for you if you do not have 30 percent to put down on the home you wish to purchase. Every lender has their own guidelines regarding this, so make sure you ask explicit questions regarding their requirements to ensure that you are all on the same page.
What Credit Scores are Required?
Another requirement is the credit score. Because this program is not watched over as carefully as QM programs, the credit score requirement can vary quite a bit. Some lenders will go as low as 680, while others will not touch a bank statement loan unless the credit score is over 700. Again, because each lender can set their own requirements, it pays to shop around until you find a lender that will accept your credit score.
Comparing bank statement loans is not as easy as comparing conventional loans because the terms can vary so much. When you have a few lenders that your criteria meets, compare the programs they offer to determine which one is the most affordable for you now as well as into the future. Keep your plans for the home in mind as well – if you are only living in the home for the short-term, you can take a higher interest rate in exchange for a lower down payment requirement. On the other hand, if this is your “forever” home, you might prefer to put more money down and take the lower interest rate in order to have lower payments for the life of the loan and a higher investment in the home. In the end, bank statement loans provide you with a lucrative way to get a home even though you are self-employed – shop around and find the perfect loan for you today!