As a self-employed borrower, you may find that qualifying for bank statement loans rather than fully documented conventional loans offers you the best terms on your mortgage. If you own a small business and take hefty deductions on your income tax returns like most people, your true income is not reflected on those returns. This could render you with a higher debt-to-income ratio, which translates either to a smaller loan amount to accommodate the lower income or a denial on your mortgage application altogether. Using your bank statements can be a plausible way to get around this problem and secure the loan size you require. If you own a business, you likely have several different types of bank statements, which ones should you use?
Understanding the Difference
You likely have your personal bank statements, which are those you use for household expenses and daily living and then your business bank statements, which are strictly from the business you own. While it might seem tempting to provide both statements for qualification purposes, it is not allowed. You have to choose one or the other unless you can clearly verify that the funds in each account are not related to one another. For example, if you transfer funds from your business account to your personal account a month or two after receiving them in your business account, they are not new funds and should not be duplicated in your qualifying income. This is another reason most lenders require the use of only one type of account per loan.
Personal Bank Statement Restrictions
If you choose to use your personal bank statements to document your income, there are certain restrictions you must abide by in order to get qualified:
- If you have anyone on the bank statements that is not a borrower on the loan, the statements cannot be used because the income cannot be differentiated between the multiple people
- If a spouse is on the bank statement, yet not on the loan, the lender will only use 50 percent of the amount of the deposits for qualification purposes
- Any large deposits that exceed the normal deposits from the business must be sourced in order to determine their eligibility
- You must own the bank account for a minimum of 12 months, but typically 24 months is required
Business Bank Statement Restrictions
If you would rather provide your business bank statements for income qualification purposes, you must meet the following requirements:
- The bank statements may only be for one business; if you have multiple businesses, you will likely have to use your personal bank statements to qualify
- If you have multiple employees, you cannot use business bank statements
- You must be the sole owner of the business, meaning you own 100 percent of it
- You must be considered a “small” business
Talking to your lender will help you determine which bank statements are best for you to use. Some businesses with few expenses can get away with using their business account for qualification purposes while others need to use personal accounts because of the complexity of the business. The good news is that either way, there are many bank statement loans that are available for the self-employed making homeownership a possibility no matter how you make your income.