A bank statement mortgage, also known by the names self-employed mortgage or alternative documentation loan, is a mortgage that enables an applicant to secure a loan from a lender without using traditional documentation such as W-2s or tax returns. Instead, the applicant submits 1-2 years’ worth of bank statements and a few other qualifying criteria that will be discussed in this article.
What are the advantages of a bank statement mortgage?
A bank statement mortgage is an ideal option for those who might not qualify through traditional methods due to the nature of their income. Advantages of the bank statement loan include the following:
- Pay stubs, W-2s, or tax returns are not required
- Usually have high loan limits
- Often allow for higher DTIs (debt-to-income ratios)
- May be used on a primary residence and also on second homes or investment properties
- An applicant can qualify with as little as 10% down
Different types of bank statement mortgages
Personal bank statement loans
A personal bank statement loan is for an individual applicant who needs this special loan because of an irregular income but can pay on a mortgage. These generally fund primary or secondary homes but may also apply to investment properties.
Business bank statement loans
A business bank statement loan is offered to a business and is meant to fund business-related purchases, such as properties, offices, warehouses, and investment properties.
One-month bank statement loans
These are far rarer than the other two categories of bank statement loans. In some special cases, the applicant qualifies under strict credit and down payment requirements, the bank may grant a loan based on bank statements covering only a month. One-month bank statement loans are not offered by many lenders. It is basically a no-income documentation loan where the bank statement activity is what gets scrutinized. If the bank statement shows unusual activity, such as a large income but simple living, the loan may be denied.
How does a bank statement mortgage work?
While a bank statement mortgage can benefit those who want loans without having to submit tax info or pay stubs, they must have a slew of other information ready to share with loan officers. Requirements change lender to lender, but be ready to submit the following information.
- 1-2 years worth of personal or business bank statements
- A credit score of 620 or above (this will vary by lender)
- A two-year history as a self-employed person
- Enough ready cash to cover several months worth of mortgage payments
- Verification of assets (i.e., mutual funds or 401k)
- Letter from tax accountant verifying business expenses and confirming that applicant files as an independent contractor
This information may be uploaded into digital mortgage software or synced with your bank to the lender. They are then approved through a manual underwriting process that can take up to 30 days to process. More complicated cases may take up to double that time.
Who would benefit from a bank statement mortgage?
Certain professions are set up in such a way as to be unacceptable for their workers who are not qualified for conventional or FHA loans because the income reported on their tax returns don’t reflect the true earnings. Deductions and business write-offs can skew the true picture. Those affected by this discrepancy can include freelancers and consultants, lawyers, doctors, small business owners, real estate agents, and investors. Bank statements will give a clearer picture of their true income and ability to pay on a mortgage loan.
A few downsides to a bank statement mortgage loan include the need for a larger down payment and potentially higher interest rates. They are also not offered by every lender. Some small business owners may qualify for conventional loans if they have been in business for over two years and have seen steady growth since. But a bank statement mortgage loan is available to newer small business owners.
A bank statement mortgage loan may also be applied to existing homeowners to refinance their mortgages. This can be a useful option to those who have left the traditional workforce since their initial home purchase but want to take advantage of home refinancing benefits.
Homeownership is an important investment and the best way to build wealth for most Americans. For those whose professions do not allow them to qualify for a conventional loan, or for those who are seeking a lower interest rate on an existing home, bank statement mortgages offer an excellent alternative to assist in the purchase of a home or business property.
If you are ready to pursue your dream of homeownership, reach out to the specialists at Hero Home Programs™ today. Our team is proud to offer access to local grants, rebates, and vendors who will assist you on your home buying journey. On average, homebuyers who use Hero Home Programs™ save thousands of dollars on their journey. Contact us today to learn how we can help you save money on your home purchase.