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If you are self-employed, then you have experienced the agony already. A lender will always ask for pay stubs, and you don’t have any. They ask for a W-2. You don’t have that either.
You have a business of your own, money in the bank, and an ongoing income, but people consider you suspicious in any bank mortgage process. This is frustrating.
For rental applications or smaller credit checks, a paystub generator can help self-employed workers present their income professionally. But when it comes to a mortgage, lenders dig deeper, and that’s where bank statement loans come in.
Bank Statement Loan
A bank statement loan is a self-employed-only mortgage. The lender checks your bank statements, generally covering 12 to 24 months. They do not ask for your pay stubs or tax returns, but self-employed people often don’t have these. They check the money entering your account regularly.
This is paramount because self-employed people may report lower taxable income on their returns. People often write off business expenses. You may increase the deductions to cut back the tax rates. However, this becomes a problem if you are applying for a traditional mortgage.
Who is This Loan Really For?
Bank statement loans are well-suited for a specific category of people. You can get the advantage of this facility if you check one of these:
- ➡️ Freelancers
- ➡️ Independent contractors
- ➡️ Business owners and sole traders
- ➡️ Real estate investors
- ➡️ Consultants
- ➡️ Workers who are seasonally employed
This loan is highly recommended for you if you have been self-employed for more than two years and you have good bank deposits.
How the Approval Process Works
You still visit your bank and ask the lenders to share a form for the bank statement loans. They are classified as non-QM (i.e., non-qualifying mortgage) lenders.
Non-QM loans for self-employed simply mean a loan that sits outside of the guidelines thresholds set by Fannie Mae and Freddie Mac. The lenders can be more flexible with your application.
Here’s how that’s usually done.
You have to submit professional copies of your personal or business bank statements. The best option is to share the statement of the past year.
The lender will calculate your average monthly payment. They might apply an expense ratio (which is usually 50–75 percent for business accounts) to calculate your net income. They will use your net income to qualify or reject your loan application.
Let’s understand with this example: your account has $15,000 average deposits per month. The lender will apply a 50 percent expense ratio and assume the net monthly income as $7,500. They calculate an affordable mortgage payment based on this value.
You must be wondering how personal bank statements are assessed. Lenders usually consider 100 percent of deposits made into a personal account because those funds have already been taxed and are separate from business expenses.
What Do Lenders Look For?
Lenders cannot rely on your bank statements alone. They also evaluate a bank statement mortgage for self-employed borrowers. They need to check at least one or two of the following factors.
- ➡️ Credit Scores: Most lenders require a score of at least 620 to 680. A score above 700 can give better rates.
- ➡️ Down Payment: You have to pay a minimum of 10 percent. Lenders will love your application if you can give 20 percent as the down payment. It makes your rate even better and increases your chance for approval.
- ➡️ Cash Reserves: Lenders need to know you have additional money on hand after closing. People with three to six months’ worth of mortgage payments are stable.
- ➡️ Self-Employment Documentation: You should share a small business license, a CPA letter, or a website that proves your business or work.
- ➡️ Debt-to-Income Ratio: Lenders check if you have any debt and how much it is. It should be below 45% to be a good applicant.
Traditional Mortgages vs Bank Statement Loans
A mortgage is based on pay stubs and taxes to prove income. This system works for salaried employees. However, many people are self-employed. In this situation, your income is not as high as the paperwork suggests.
Bank statement loans fix this problem by relying on actual cash flow to determine your finances. The only downside is that the rates on non-QM loans are about 0.25% (25 basis points) higher than conventional ones.
This difference is somewhere between half a percent and one and a half percent above the normal rates for the lender. The exact value depends on your credit and down payment. Different banks also have different rates. You will face a higher rate if the risk is higher and the bank shows more flexibility.
A Note on Records and Earnings
Do not directly go to a bank to apply for a loan. You should be prepared beforehand. Collect all your documents that include your personal and financial information. This makes the process hassle-free.
You should always separate your personal and business accounts. Using the same account for both purposes shows your irresponsible nature. It shows that you are not good at managing finances. This creates confusion for lenders.
Do you have separate accounts? Always note down the transactions from your business to your personal account. Lenders have to see a trend rather than an irregular-sounding one-off deposit.
How to Strengthen Your Application
You have to put in more effort to increase your chances of acceptance. Take these steps ahead of time to improve your odds before applying.
- ➡️ Boost Your Credit Score: How much money do you owe? Lower your credit utilization ratio. A higher score means lower interest rates on non-QM loans.
- ➡️ Hold All Your Deposits: Do not make large, likely untraceable cash deposits. Lenders like to see a consistent income stream that is relevant to your business niche.
- ➡️ Increase Your Down Payment: If you can do 20% or greater, then your lender’s risk goes way down. It often results in flexible underwriting and quicker approval.
- ➡️ Obtain a CPA Letter: A letter from a CPA certifying that you own a business and your ratio of expenses to income bolsters professionalism in the file.
How to Find a Suitable Lender
Traditionally, many institutions only follow Fannie Mae guidelines, which is why not every bank offers bank statement loans. To find the right fit:
- ➡️ Search For Non-QM Specialists: Seek lenders who are advertising “Alternative Mortgage Self-Employed” products.
- ➡️ Get an Expert Opinion: Mortgage Brokers have wholesale access. They can float your bank statements to see who has the most generous income calculation.
- ➡️ Check Out Reviews: Read the reviews from other self-employed borrowers to confirm that the lender’s process is as hassle-free as they claim.
- ➡️ Look at the Buy-Down Options: Inquire whether you can pay points up front to get the interest rate down. It may save thousands of dollars over the life of your loan.
Are Bank Statement Loans the Right Fit for You?
Bank statement loans are a good option if you have at least two years of experience as a self-employed individual. You should try to get a loan based on your tax returns, but if that fails, you can rely on your bank statement.
Bank statement loans are a real mortgage product designed for the way self-employed clients actually run their business. The rates here are a little higher, but at least you can get a loan.
