FHA loans are still the most popular loans for homeowners. However, as more and more people looking to buy their first homes, they are discovering other types of loans, including bank statement loan programs. These programs came about because there were no alternatives for those who were unable to verify their income the traditional way. With a bank statement loan, you verify your income with bank statements instead of pay stubs or tax returns.
These loans do not meet the Qualified Mortgage Guidelines and are often called non-QM loans, or non-qualified mortgage loans. Many banks are now offering these programs for borrowers with a good credit history but don’t have a standard income. Let’s take a look at the different types of borrowers who may benefit from a bank statement loan program.
Self-employed individuals are the most common borrower that can easily qualify for a bank statement loan program. These individuals make an income, but can’t verify it using paystubs.
You may think that tax returns would suffice. However, lenders need to use the net income you claim not the true net income that you make. Before bank statement loans came about, it was incredibly difficult for self-employed individuals to buy a house.
Bank Statement Loans now make it possible for the self-employed to purchase property much more easily. By providing the lender with 12 months of bank statements that show the regular receipt of income, self- employed borrowers can get a loan for a home. The lender will still need to see the expenses, but they don’t penalize the borrower for what’s written off a tax return.
To ensure that you qualify for this loan, you should have good or excellent credit, plenty of money available to pay your mortgage payment if your income falls through, and a decent down payment on the house.
Many people in the US work seasonally. This means that they spend one season making their entire year’s income. If you are an employee, but your work is seasonal, you are a great candidate for a Bank Statement Loan.
A conventional lender will take what the borrower made in a season and annualize it to see how much they have made in a year. This makes your monthly gross income smaller and your ability to qualify for a loan nearly impossible.
Bank Statement Loan programs allow you to document your income with your bank statements. You must hold the seasonal job for at least two years in order to use the income. The mortgage lender will still annualize the income but can use any other income you bring in on a regular basis with your bank statements.
Commissioned employees typically get paid for making a sale. They bring in a certain percentage of the total amount of the sale. Some employers will also pay commissioned individuals hourly.
If you are solely a commissioned employee, it can be difficult to get a traditional loan. Commission is not a regular receipt of income. You will make different amounts each month, some will be higher, and others will be lower.
A lender will annualize your total income, but traditional lenders will want to see your tax returns. If you work on a commission basis, you may have a lot of write-offs for your job. These write-offs will decrease the total amount of income you can use to qualify for a loan.
When using bank statements to prove income, the lender will deduct fewer expenses from your income to give you a better chance of approval.
Those Living off of Assets
Some individuals don’t need to work but would benefit from a mortgage. It’s difficult to get approved for a loan when you don’t have proof of income.
If you can prove that you have a steady stream of income from another source, like a pension, social security, or investments, you can use that income to qualify for a mortgage with a Bank Statement Loan. In order to do so, you must have at least three years of income coming to you.
What to Keep in Mind
Consider Varying Terms
The terms of a Bank Statement Loan will always vary depending on the borrower and their particular circumstances. It is not a conventional loan program and does not abide by the same rules as qualified mortgages. Lenders can charge more on these loans and vary the terms as they see fit.
After you’ve decided that Bank Statement Loans are the best option for you, you should apply with several lenders and compare offers. You may find that one lender offers significantly better terms.
Are Bank Statement Loans Right for Me?
Many people believe that bank statement loans are the last option and will have worse terms than a traditional FHA loan. This is untrue. Each loan has its own advantages, especially for the different types of income you may receive.
Unless you’re a mortgage lender, it can be difficult to determine which loans are best for you. You may qualify for multiple types of loans, but the differences are in the terms and the amounts you pay, including down payments.
Every lender and loan is different, so it’s in your best interest to talk to a professional. Let them know your goals, where you are looking for houses, and any of your financial details. Make sure they know the type of income you receive, including your job.