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Are you a self-employed entrepreneur, small business owner, or freelancer looking to purchase a home? Do you take advantage of tax write offs for your business? A bank statement loan could be a great solution.
Self-employed borrowers are required to prove their income by what they pay in taxes, not what they made. This has prevented many low risk borrowers like freelancers, contractors, and other professionals from being able to purchase a home. The reality is, self-employed borrowers must write off business expenses in order for their business or company to be profitable. This strategy of course does not represent the true income the business has made but shows a reduced amount for tax purposes. Who would have thought that being tax efficient would prevent you from purchasing a home? Luckily the bank statement loan program changes all that.
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What is a bank statement loan?
A bank statement loan is a type of mortgage loan that lets you qualify for a loan based on your bank statements rather than your tax returns. The program helps self-employed borrowers with tax write offs qualify for a home loan. Specifically, borrowers who claim their expenses for their business and reduce their adjusted gross income (AGI). It was designed to help responsible self-employed borrowers purchase a home using only bank statements instead of the traditional personal & business tax returns along with other extensive paperwork.
Why apply for a bank statement loan?
A bank statement loan, often referred to as a “bank statement mortgage” or “self-employed mortgage,” is a type of mortgage loan designed for individuals or businesses who have a more complex financial situation. It allows borrowers to use their bank statements, rather than traditional income documentation, to demonstrate their ability to repay the loan.
Here are some reasons why someone might choose to apply for a bank statement loan:
Self-Employment: Self-employed individuals often have income that varies from month to month, making it challenging to provide consistent income documentation. Bank statement loans allow them to use their business and personal bank statements to demonstrate their income.
Irregular Income: Some borrowers have irregular sources of income, such as freelancers, contractors, or seasonal workers. This type of loan can accommodate their financial situation.
Tax Deductions: Self-employed individuals often take advantage of various tax deductions, which can reduce their reported income on tax returns. Bank Statement Only Loans can consider gross income instead of taxable income, making it easier for these individuals to qualify for a mortgage.
Credit Issues: People with less-than-perfect credit may find it easier to qualify for a bank statement loan compared to traditional mortgage options. Lenders may be more lenient when evaluating creditworthiness in such cases.
No Income Verification: With traditional mortgages, lenders usually require extensive income documentation, such as W-2 forms and tax returns. Bank statement loans, on the other hand, have more flexible income verification requirements, making it accessible to borrowers who can’t provide these documents.
Investment Properties: Real estate investors often use bank statement loans, especially if they own multiple properties and their rental income contributes significantly to their ability to repay the mortgage.
Quick Approval: The underwriting process for Bank Statement Only Loans can be faster than traditional mortgages since it relies on bank statements and a borrower’s overall financial picture rather than detailed income verification.
How does a bank statement loan work?
Potential borrowers must show sufficient deposits into their business or personal bank accounts to show cash flow and to calculate qualifying income. This means that your deposits must exceed all operating expenses associated with the property, including mortgage payments and debt showing up on your credit report. To prove this capacity, lenders require 12-24 months of bank statements during the application process. Meeting this criteria is essential for obtaining a Bank Statement Only Loan.
Who qualifies for a bank statement loan?
Here are some factors that can affect eligibility for a bank statement loan:
Self-Employment: Many bank statement loans are tailored for self-employed individuals, freelancers, independent contractors, and business owners who may not have consistent or easily verifiable income. To qualify, you usually need to be able to provide at least 12 to 24 months of business and/or personal bank statements.
Stable Banking History: Stable banking history to assess your financial stability is required. Consistent deposits and limited overdrafts or negative balances on your bank statements can be favorable.
Strong Credit History: While bank statement loans may be more flexible with income verification, a minimum 660 credit is required. A good credit score can improve your chances of approval and may help you secure more favorable terms.
Down Payment: You will need a larger down payment for a bank statement loans compared to a traditional mortgage. Down payment requirements can vary, but they are often in the range of 10% to 20% or more of the home’s purchase price.
Debt-to-Income Ratio: Lenders will still evaluate your debt-to-income (DTI) ratio, which is a measure of your ability to manage debt payments in relation to your income. A lower DTI under 45% is generally more favorable.
Cash Reserves: Cash reserves after down payment are needed, which are funds set aside for emergencies, in addition to the down payment.
Business Profitability: For self-employed borrowers, the profitability and stability of your business will be reviewed. Business tax returns, profit and loss statements, and other financial documents.
Income Consistency: Even though bank statement loans don’t rely on traditional income documentation, a reasonable level of consistency in your income deposits is needed. If your bank statements show extremely erratic income, it could raise concerns.
Keep in mind that because bank statement loans are typically considered higher risk by lenders, they often come with higher interest rates compared to conventional mortgages. It’s crucial to carefully assess your financial situation and whether this type of loan is the best option for your needs.
It’s important to remember that bank statement loans typically come with higher interest rates and may require a larger down payment compared to traditional mortgages. Borrowers should carefully consider the terms and assess their ability to repay the loan before applying. Consulting with a mortgage advisor is extremely beneficial to determine if this type of loan is the right choice you. Speaking with one of our mortgage advisors will help you make informed decisions about how the bank statement loan process works and whether it’s a good fit for you.
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