With the ever-increasing number of freelance, gig-economy, and other non-traditional employment, it’s no wonder that some banks are moving away from only offering traditional, qualified loans. One of the newest programs for non-traditional workers is the 24-month bank statement loan. These bank statement loans take a holistic look at a worker’s income instead of relying only on W2s.
What’s the difference?
With traditional loans, lenders examine several years of pay stubs, tax returns, and W2s to determine the risk involved with lending to a particular borrower. This works for traditional employees but doesn’t help those with non-traditional income. These workers may have inconsistent or seasonal income, multiple income streams, and heavy tax deductions.
Instead of relying on W2s, bank statement loans use your average gross income over 24 months. This allows the lender to have a bigger picture of your income as opposed to only seeing snapshots.
Requirements are going to vary by lender. Since bank statement loans are considered to be non-qualified mortgage loans, lenders can create their own requirements. While there will be variation, there are some standard requirements that you will encounter.
- Bank statements: You will need to submit 24 months of bank statements. Some lenders will accept both personal and business accounts, while others may only look at your business bank accounts.
- Down payment: Typically, a minimum down payment of 10% will be required. If your credit score is low, however, you could expect to be required to put down closer to 20%.
- Credit score: There are programs out there for those with credit scores around 500, but most lenders are looking for a FICO score of at least 580. The lower your score, the higher the down payment will need to be.
- Debt to income ratio (BTI): Most lenders will allow for slightly higher than usual debt to income ratios. The maximum is often around 50%.
- Loan amount: The amount allowed will vary. Some will allow no more than a loan of $2,000,000 while others might go as high as $5,000,000.
- Profit and loss statement (P&L): Lenders will often require an official P&L statement prepared by a CPA.
Stay Organized: Since lenders will be looking at monthly bank statements, it is important that you stay on top of the organization. This means having any documents associated with your business easily accessible: proof of employment, business licenses, contracts, etc. Keeping track of multiple income streams can be difficult, so start this habit early.
Educate: It’s likely that your lender may not understand exactly what you do. Be prepared to succinctly describe your industry, seasonal changes, and so on. If possible, save articles or other information pieces about your work that can help someone with zero knowledge of the industry better understand it.
Reduce debt: While some bank statement mortgage programs allow for a higher debt to income ratio, the amount of debt you have can directly impact your credit score. Getting more than the minimum credit score will result In better interest rates and lower down payments. It may be worth paying down debt over making a larger down payment as it will reduce your interest rate.
Have you had success qualifying for 24-month personal bank statement loan programs? Share your tips by commenting below.