Explore the best bank statement loan programs with Pride Lending!
Bank Statement Loans: Proving Your Income, Your Way
Self-employed borrowers often struggle to qualify for traditional mortgage loans due to the requirement for traditional income documents, such as W2s, pay stubs, and tax returns.
As non-traditional income earners may use 1099s or invoices to measure their cash flow, their financial history may make them seem like risky borrowers even if they have ample assets. Those with inconsistent income, like gig workers, may also struggle to receive traditional loans because of the lack of documentation.
Thankfully, bank statement loans, which are a subset of non-QM loans, use different income verification: your bank account. A bank statement loan lender will review your personal and business accounts to determine whether you can afford your mortgage payments with your current income.
Bank statement mortgage programs are the perfect solution for self-employed individuals and small business owners who find it difficult to access conventional loans due to their unconventional tax returns and lack of pay stubs.
With these home loans, you can finally achieve homeownership – or real estate investment – thanks to more flexible loan approval guidelines.
Benefits of Bank Statement Loans
A bank statement mortgage loan verifies a borrower’s income based on different metrics than a typical mortgage loan, making it an excellent option for those who cannot access a conventional loan.
A loan officer from Pride Lending can help you explore the benefits of this unique mortgage product, which includes the following.
Ideal for Self-Employed Borrowers
A self-employed borrower with sufficient income may still struggle to access traditional mortgages because they lack the documentation required by the Consumer Finance Protection Bureau to underwrite a conventional home loan.
This can further the difference in homeownership between marginalized communities and their counterparts due to the fact that many LGBTQ+ and BIPOC people choose non-traditional income streams. For example, 13% of all freelancers identify as LGBTQ+. Given that LGBTQ+ people are less than 10% of the population, they are overrepresented in these fields.
About 26% of independent workers are Hispanic, and 14% are Black, but Hispanic people only make up about 19% of the population, so they are overrepresented in these fields. The traditional financing structure, as well as systematic issues in access to funding, can make it even harder for these self-employed borrowers to achieve homeownership or investment success.
Thankfully, mortgage lenders can underwrite bank statement mortgages based on different metrics that calculate net income; namely, business or personal bank statements.
No Tax Returns Required
Tax returns can be complicated for self-employed individuals and entrepreneurs, who may have more than one income stream. A business owner buying an investment property may have sufficient assets, but this may not be apparent on their personal tax returns, while a self-employed borrower won’t have the pay stubs that document their income.
Bank statement loans work by looking at income trends over a period of time, typically 12 to 24 months, to identify whether you’ll be able to cover your monthly payment with your average income. This means you won’t have to provide any tax returns, saving you needless hassle and stress.
Flexible Underwriting Guidelines
While bank statement loans are an excellent option for the self-employed, they are also great for non-prime borrowers, such as those with lower credit scores. This is especially important for LGBTQ+ and BIPOC borrowers, who often have lower scores. LGBTQ+ adults were twice as likely as their cishet peers to have poor scores due in part to their lower salaries.
BIPOC individuals also face issues with their credit. For example, Black and Hispanic consumers are 1.8 times more likely than white individuals to be “credit invisible,” meaning that they have no credit history that can be used to qualify for a loan. Native Americans have an average score of just 612 compared to the 727 score of their white peers, while Black consumers have an average score that is a full 100 points lower than white individuals. They may not be able to qualify for any loan, especially if they are also self-employed.
Because these non-QM loans don’t have to adhere to conventional mortgage standards, lenders are more willing to approve loans for those who would not otherwise qualify in return for a higher interest rate and a larger down payment.
Additionally, you may be able to secure a bank statement loan even if you have had a recent adverse credit event, such as a foreclosure or bankruptcy, which would otherwise make it incredibly hard to access financing.
Because the mortgage lender will focus primarily on bank statements rather than credit scores, those with significant assets but black marks on their credit report can still qualify.
As a last point, bank statement loans are not bound by conventional loan limits, which can reduce the amount of funding you can access. These higher loan limits mean that you can afford a larger property if your bank statements demonstrate your ability to cover the home’s purchase price.
The larger loan amount options provided by bank statement loans are very advantageous for self-employed investors who intend to buy a promising property and turn it into a high-performing rental.
Competitive Interest Rates
While one disadvantage of bank statement loans is potentially higher interest rates, it’s possible to shop around and find excellent rates that may not be achievable with a typical mortgage.
Our loan officers will work hard to find you the best rates on bank statement loans based on your particular financial metrics, including credit history, bank statements, and down payments.
Can Be Used for Primary Residences, Second Homes, and Investment Properties
In addition to having a maximum loan amount, many traditional loans restrict the property types you can purchase. For example, with VA loans, eligible service members can only purchase a primary residence that they will live in the majority of the year, reducing the potential profit from the home. FHA loans and USDA loans have the same restrictions.
While conventional loans can often be used for secondary residences, they limit the number of units a property can have, making it difficult for a rental business owner to buy large apartment complexes.
Bank statement loans can be used for numerous property types, including primary residences, second homes, and investment properties. Bank statement mortgage lenders are primarily concerned with whether you can afford the monthly payment rather than how you intend to use it, so they offer greater flexibility with property usage.
A bank statement loan offers additional benefits for investors in that it is focused on their own cash flow rather than a target property’s current production.
Other options, like debt service coverage ratio (DSCR) loans, consider how much income a home can achieve in its current state, making it difficult to take a chance on a rental that needs significant work before it can perform well.
Bank statement loans consider your personal or business financial history rather than that of the target property when identifying your eligible loan amounts, which gives you more opportunities to take bold chances with investments.
Fast Processing
Another benefit of bank statement loans is that their approval process is much shorter, as the underwriting portion is abbreviated, thanks to the reduced paperwork. The underwriter does not have to pour over your tax returns, employment history, and pay stubs; rather, they look at your credit score, bank statement, and details about the property when identifying whether you’re eligible.
You can often close on a bank statement loan within a month, though it may take longer if you have multiple bank accounts to review, such as if you are a small business owner or a self-employed freelancer who works multiple gigs.
How Bank Statement Loans Work
While some of the elements of bank statement loan approval are similar to those of other mortgages, there are some unique elements that our loan officers will walk you through. When preparing to apply for bank statement loans, consider these crucial components of how this loan works.
How Many Months of Bank Statements Are Typically Required
Your mortgage lender will want you to provide bank statements when applying for any mortgage, but they generally only want 2 to 3 months of statements for the typical loan. With bank statement loans, you must provide 12 to 24 months of consecutive bank statements.
You must show bank statements from any account that will or could be used to pay the loan amount. Small business owners will also need to show business bank statements to prove that should they struggle to pay the mortgage with their own income, there are assets that can be tapped to cover the difference.
How Income Is Calculated
With bank statement loans, your income is calculated using the average of your monthly deposits rather than looking at it month by month.
Mortgage lenders recognize that self-employed individuals and small business owners may have fluctuating incomes due to seasonal variations or because they work on a by-project basis, so they assume that when you have a short month, you’ll be able to use savings from a good month to make mortgage payments.
As with other mortgages, this will then be used to identify what loan amount you can afford based on the 28/36 rule. This rule assumes that you should spend no more than 28% of your monthly income on housing.
What Types of Bank Accounts Are Accepted
For bank statement loans, lenders will accept several different types of accounts, including business accounts. You should provide a bank statement from all the checking, savings, and investment accounts you have access to in order to demonstrate the sum of your assets.
Bank Statement Loan Requirements
While bank statement loans are often more accessible than other types of loans, they do have eligibility criteria. The better your borrowing profile, the more competitive rates you can access and the less money you will need to put down upfront.
Minimum Credit Score
You may be able to qualify for bank statement loans with a credit score as low as 620, but many lenders will want much higher than this. If you have a score above 700, you’ll be considered a prime borrower, and you will get access to the best terms.
Down Payment Requirements
The maximum loan-to-value ratio for a bank statement loan is typically 90%, meaning that you would need a 10% down payment. However, lenders may request more depending on your creditworthiness.
These loans may have higher closing costs than with other products, so it’s important to speak to your lender beforehand to learn exactly how much will be expected of you at closing time.
Debt-To-Income (DTI) Ratio Considerations
Generally, a lender will expect a DTI of no more than 43% for a bank statement loan, though some lenders may go higher than this, sometimes up to 50%. As with your credit score, the lower your DTI, the more likely you will get advantageous terms.
Eligible Property Types
Bank statement loans are available for numerous property types, many of which may be very difficult to finance with other mortgage products. This is because lenders are freed from the constraints of Fannie Mae and Freddie Mac, which purchases conventional mortgages for resale on the secondary mortgage market; these loans are held by the lender for the long term.
Property types you can purchase with a bank statement loan include primary residences, second homes, and investment homes.
Primary Residence
A primary residence is one that you live in for the majority of the year; it’s the property that you will list on official documents as your address.
While many borrowers will seek a Fannie Mae or Freddie Mac loan to buy a primary residence, this may not be possible for a self-employed person, which is why a bank statement loan becomes such a useful financing tool for these individuals.
A bank statement loan can be an essential way to reduce disparities in homeownership rates between different demographics. For example, only 46% of LGBTQ+ individuals own their own property; homeownership rates are just 44% for Black households. Asian and Hispanic individuals also have lower homeownership rates than their white colleagues.
Second Home
A second home is often known as a vacation home. You may spend significant time here, but it’s not listed as your primary residence, and you do not reside there more than 6 months out of the year.
Many individuals will use a second home as both a vacation spot and an investment vehicle by renting it out when they’re not there, meaning that it serves as a hybrid between a personal residence and a rental.
Because many loan products can only be used for your own primary residence, they can be difficult to finance. A bank statement loan has no residency restrictions, as lenders are primarily concerned with whether your income is high enough to afford the mortgage rather than whether you live there.
Investment Property
A bank statement loan is a perfect option for investors who want to buy larger properties than would be possible with a Fannie Mae or Freddie Mac loan, which restricts home purchases to those with four units or less.
Unlike with a DSCR loan, you qualify for a bank statement loan based on your own income rather than that of the property. This makes it easier to buy buildings with no known rental history or that you intend to rehab to improve its income stream.
Many investors use a bank statement loan to buy a fixer-upper since DSCR loans generally expect properties to be move-in ready.
Tips for Applying for a Bank Statement Loan
While a bank statement loan is easier to acquire than a conventional home loan, it does require a bit of preparation and planning to ease the underwriting process. An expert from our team will help you get your documentation in good shape so that the bank statement loan application process is as simple as possible.
Organize Your Business Bank Statements
Bank statement mortgages typically require up to two years of bank statements, which can require significant organization. You should neatly organize all the bank statements you intend to submit by the date, account number, and type, whether that is business or personal.
Lenders would also like to see that you have significant savings to assist should your business have a slow period. Before applying, prepare an income statement that demonstrates how much you have in cash reserves and clearly outlines your liabilities.
Maintain Consistent Deposits
Bank statements with inconsistent deposits are often a red flag for lenders, as they may suggest that you are taking out loans to cover other debts that you have not disclosed. As such, it’s important to make sure you prove you have a steady income stream and are not likely to run into financial trouble.
Frequent deposits will earn you a higher chance of approval, as it suggests that you’ll receive a regular monthly income to cover your mortgage. Even if you are paid quarterly or by project, transfer funds into your target bank account biweekly or monthly to show that you’ll have sufficient funds throughout the year.
Prepare Additional Documentation
In addition to bank statements, you should expect to provide proof of identification, business documents if you are a business owner, investment account information, and a list of debts. Self-employed borrowers will want to demonstrate that they have a steady business by offering invoices matching their deposits.
Having all of this prepared ahead of time will greatly ease the process of applying for a loan. Our loan team can also help point out any documentation that can bolster your application, including details about the property if this is an investment.
Work with a Knowledgeable Mortgage Broker
Like an officer from Pride Lending, a great mortgage broker can help you find the best bank statement products for your specific needs. We’ll get to know you and your financial goals to match you with an excellent rate, a low down payment option, and competitive terms.
Additionally, we can demystify the process for you, easing the process so that you can get approved as quickly as possible. Most importantly, our team will be honest with you and take a close look at your options, including discussing the pros and cons of bank statement loans so that you’re fully familiar with your choices.
Why Choose Pride Lending for Your Bank Statement Loan?
Pride Lending is committed to helping people from all walks of life achieve their homeownership goals, whether they are freelancers or investors.
We serve as advocates for those traditionally sidelined by mortgage companies, and our deep experience in the mortgage industry allows us to find the perfect solutions for your specific needs. Our team is composed of allies and members of marginalized communities, including BIPOC and LGBTQ+ individuals.
We’re proud to be the first LGBTQ-focused mortgage company in the United States, certified by the National Gay and Lesbian Chamber of Commerce as an LGBT Business Enterprise.
With our help, borrowers can get the keys to the property of their dreams, whether they are self-employed borrowers with non-traditional income or business owners looking to expand their reach.
Get One Step Close to Owning Your Dream House With Bank Statement Loans
If you’re ready to take the first step toward a bank statement loan, contact us today! Apply online for maximum convenience, or simply call us to discuss your specific needs and learn how we can assist.
Pride Lending is here for you every step of the way, helping you buy with confidence. We look forward to assisting you in accessing homeownership your way.
