What is a bank statement loan?

A bank statement loan, also called a stated income loan, bypasses traditional mortgage requirements like W-2s and tax returns. Instead, people can verify income using bank statements, beneficial for those with irregular income or significant tax deductions such as self-employed individuals, small business owners, doctors, lawyers, real estate agents, or investors.

Suppose a tax return reports a $150,000 income, $250,000 was really earned, but because substantial business travel expenses could be deducted, bank statements provide a more accurate representation of income compared to tax returns.

How do bank statement loans work?

Applicants need to submit two years of personal and business bank statements, along with additional business and expense details if relevant.

Bank statement lenders assess factors like business type, employee count, and physical presence to determine expense considerations. The lender evaluates the applicant’s income, calculating their net income. If they satisfy the lender’s additional criteria, they will receive preapproval for a specific loan amount.

Bank statement loan requirements

Generally, bank statement loans accept credit scores starting at 620, but rates and terms improve with scores of 700 or higher. Lower scores may require a larger down payment to mitigate lender risk. Basic requirements include:

• providing two years of bank statements and a business profit and loss statement
• making a minimum 10% down payment
• maintaining adequate cash reserves
• having a credit score of at least 620
• ensuring a DTI ratio under 45%
• submitting relevant business documents and licenses.

Bank statement loan example

A self-employed individual with a 740-credit score is aiming to buy a home. With a fluctuating monthly income averaging $6,875 and $800 toward debt payments, a lender permitting a 45% DTI ratio could approve a mortgage around $2,295 monthly. Actual eligibility hinges on prevailing interest rates, down payment, and various factors.

How to apply for a bank statement loan

If a mortgage lender doesn’t offer bank statement loans, consider seeking assistance from a mortgage broker. Brokers collaborate with various wholesale lenders, granting access to diverse mortgage options. Brokers typically don’t charge borrowers directly; instead, fees are usually covered by the lender, potentially reflected in higher rates. Ensure the chosen broker is licensed in the proper, corresponding state and experienced with bank statement loans. Once selected, collaborate to identify suitable lenders. Moving forward:

• Get preapproved: Discuss the specific situation with loan officers to gauge potential loan terms and borrowing limits.
• Compare offers: Scrutinize estimated closing costs, APRs, and fees from different lenders to find the most favorable terms.
• Apply formally: Collect required documents and information to complete the application process with the chosen lender.

Pros of bank statement mortgages

• Flexibility: Bank statement loans accommodate non-traditional income sources, substituting bank statements for standard documents.
• Accessibility: Approval for a bank statement mortgage is possible with credit scores as low as 620, making it accessible to many borrowers.
• Higher loan limits: Bank statement loans often offer larger borrowing capacities compared to conventional loans.

Cons of bank statement mortgages

• Increased borrowing expenses: Bank statement loans typically entail higher interest rates due to their riskier nature.
• Larger down payment: Lenders often mandate a minimum down payment of 10%, surpassing requirements for conventional and government-backed loans.
• Prepayment penalties: Certain bank statement loans impose penalties for early repayment or refinancing, potentially inflating costs.

How non-QM loans relate to bank statement loans and alternative options

Bank statement loans, considered riskier than typical mortgages due to their non-qualified mortgage (non-QM) status, lack backing from Fannie Mae and Freddie Mac, reducing protection for lenders and borrowers. These loans often feature higher interest rates and fewer consumer protections, with characteristics like negative amortization or balloon payments. Despite challenges, they broaden borrower eligibility.

Conventional mortgages, like the 30-year fixed-rate or FHA loans, are more common and require stable income evidenced by pay stubs, W-2s, and tax returns. They typically demand a 3% down payment and a 620-credit score. Bank statement loans, while less common, cater to self-employed or irregular income earners with unique eligibility criteria. Alternative mortgages, offering more flexibility and lower costs, present viable options for borrowers

These include:

• Conventional loans: Widely available with favorable interest rates, especially for those with pay stubs.
• FHA loans: Flexible qualifications, popular among first-time buyers.
• VA loans: No down payment for eligible service members, veterans, and spouses.
• Asset depletion loans: Leveraging assets for qualification, although costly; selling assets may be an alternative.
• DSCR loans: Real estate investors may qualify based on cash flow and repayment ability, though lenders calculate conservatively.
• Interest-only loans: Initially low-cost, but no equity accumulation and potential payment challenges later.
• Portfolio loans: Held by the lender, offering flexible standards; advantageous for high-value clients or those with existing relationships. Consider maintaining accounts with a portfolio lender for mortgage benefits.

 

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