Who has the hardest time getting a loan approved? The self-employed, especially since the 2007 crash brought about by abuse of the no doc and stated income loan products that existed then. What can the self-employed do?

 

A few lenders have developed a program called bank statement loans.

This new loan program requires business owners to provide 12-24 months bank statements to be used as proof of income. The lenders essentially use the average monthly deposits as qualifying income. Assets are still required to be fully documented.

 

Bank Statement Loan Requirements
  • Borrowers must be self-employed for a minimum of two years
  • You will be asked to provide one or more of the following…
  • A business listing
  • Your business website address
  • A letter from your accountant verifying that you have been in business for at least two years.
  • If you have a co-borrower who is a W2 wage earner, that person will need to fully document his or her income.
Minimum Credit Score Requirement 
Credit scores play a major role in all types of loans including conventional and government mortgages. They often will help determine what your rate will be, what the down payment will be and often whether you qualify at all for the mortgage.
A good loan officer will have a feel for this during your initial discussions. For bank statement loans, some lenders will accept scores in the low to mid 500’s but that will impact your rate and down payment.

If your credit score is lower, there are some great ways to improve your credit score in order to buy a home that you should be aware of!

 

Down Payment Requirement 

Each lender may vary but bank statement loans will typically require anywhere from 10%-20% down. Compensating factors such as high credit scores and large average monthly bank statement deposits could result in a lower down payment for you. Gift funds from a relative may also be permitted.

 

Asset Requirements 

Assets need to be fully verified. The more assets you have, the stronger your application will be making it easier to get an approval. Assets to be verified include bank statements, 401k and other retirement accounts, stocks or brokerage account statements, real estate owned and any other significant assets.

 

Bank Statement and Deposit Requirements 
Bank statement mortgage lenders will ask for a minimum of 12 months and up to 24 months bank statements. They will total of the deposits for that time frame and will then will divide by 12 or 24 to get an average. They use 100% of the personal bank statement deposits and 50-75% of the business bank statement deposits.

 

Here is an example of how the bank deposits will be used as income:

Business Bank Account – 12 months deposits with a total of $100,000 deposited Divided by 12 = $8,333 …. 50% will be used = $4,166 monthly income
Personal Bank Account – 12 month’s deposits with a total of $100,000 deposited Divided by 12 = $8,333 monthly income.

If you have deposits in both business and personal accounts, the averages can be combined. In the example above, the lender will use $4,166 + $8,333 to come up with a total of $12,499 monthly income.

 

Pros and Cons of Bank Statement Loans
 Pros
  • Small down payment as low as 10% required.
  • No tax returns needed to verify income.
  • Rates are reasonable considering only bank statements are being provided.
  • Debt to Equity Ratio (DTI) requirements are higher than conventional loans. Sometimes as high as 50%.
  • Most have no pre-payment penalties.
Cons
  • Bank statement loans are only available to self-employed borrowers.
  • You cannot use 100% of your business bank deposits.
  • Rates are slightly higher than conventional but not much more.
  • This program is not easy to find as traditional lenders do not offer them.