If you have income that is difficult to document or take advantage of many tax write-offs, you might find it challenging to qualify for a traditional home loan. Regulatory measures from the Consumer Financial Protection Bureau can make it more difficult to qualify for a mortgage without a standard W2. Luckily, there is a newer product out there: the bank statement loan.
What is a bank statement mortgage?
A typical mortgage looks at your W2s to gauge your income. This helps them determine if you make enough to be able to pay back your loan. If you are an independent contractor, self-employed, or earn seasonal/inconsistent income, your W2s may not tell the whole story. In some cases, you won’t have W2s to share.
A bank statement mortgage lender will look at your monthly bank statements instead of your W2s or pay stubs. This helps lenders see how your non-traditional qualifying income works without having to work around tax deductions, seasonal changes, or multiple income streams.
Bank statement loans are considered non qualified mortgage programs, which means lenders can create their own guidelines instead of using the uniform requirements set for qualified mortgages. This allows for greater flexibility over standard programs and will vary by lender. In general, there are several requirements to consider:
- At least 12 months of bank statement; often 24 months
- Personal or business statements; often both
- Profit and loss statement for the past 12-24 months
Gross income is typically calculated by taking an average of your monthly gross income over the reviewed time period. They add up all of the normal deposits and then dividing by the number of months being reviewed. This helps create a more realistic gross income number for those with inconsistent or seasonal work.
As with traditional loans, you’ll want to monitor and take steps to keep your credit score as high as possible. A lower score will result in a higher interest and mortgage rates and more substantial down payment. Some options allow for scores as low as 500, but higher will always be better.
Debt to Income
Lenders always want to make sure you don’t have too much debt to make your mortgage payment each month. If you have a higher credit score, they may allow you to have a higher debt to income ratio, but it is always best to reduce your debt as much as possible before applying.
Many bank statement programs require that you have three to six months of mortgage payments in reserve in case of an emergency. This provides extra cushion in case something happens. Non-traditional work can be unpredictable, so the lender wants to reduce as much risk as possible. The emergency fund requirement is often based on the total monthly housing expense: mortgage payment, property taxes, homeowner’s insurance, and any other applicable expenses, like an HOA fee.
Did you qualify for a bank statement loan program? Please share your experience and tips for others by commenting below.