Bank Statement Mortgage Loans are on the rise. Why? Because it is far easier for self employed borrowers and investors to obtain a mortgage loan in an “untraditional” manner.
What is a Bank Statement Mortgage Loan?
Banks Statement Mortgage Loans for Self-employed borrowers
Banks Statement Mortgage Loans for Real Estate investors
What is a Bank Statement loan?
According to the FDIC, and other government financial organizations, banks should have only accepted reduced income documentation if the loan had other assurances that the borrower could afford the loan. For example, a stated income loan often required a higher down payment than a traditionally underwritten home loan. However, stated income loans rapidly grew in popularity and, as we all remember, underwriting standards slipped. By 2005, stated income loans constituted over one third (37.2%) of all mortgages being originated.
Alternative loans that share similar qualities to these loans are starting to make a comeback. These loans — more accurately referred to as “alternative documentation loans” or “cash flow loans for investors” — are becoming more popular. These alternative documentation methods meet the ability-to-repay standards in the law, but the methods help borrowers qualify for mortgages that traditional lenders won’t issue.
If you’re a self-employed borrower or a real estate investor, mortgages from a non-QM (non Qualified Mortgage) lender may be the best way to purchase a house. Below we explain how self-employed borrowers and real estate investors can find alternative documentation loans suited to their needs.
How to find Bank Statement Mortgage Loan programs
Not all lenders issue bank statement loans, but will can find the best bank statement mortgage loan for you.
To get the best deal on a bank statement loan for you, we will request a loan estimate from at least three lenders. Loan estimates are documents that includes an estimated interest rate, closing costs, and an estimated monthly payment for a mortgage.
Bank Statement Mortgage Loans for self-employed borrowers
Variable incomes combined with tough documentation requirements make traditional mortgages difficult to obtain for some self-employed borrowers.
Bank statement loans are loans where lenders use bank statements, rather than tax documents, to analyze a borrower’s income. Non-QM lenders working with self-employed borrowers will analyze 12 to 24 months of bank statements to determine a self-employed person’s net income. Each lender uses a slightly different formula to determine a borrower’s net income. In most cases, the net income reflects a person’s income after paying work-related expenses and taxes.
To qualify for a bank statement loan, a borrower typically needs at least two years of experience and income as a self-employed person but there are always exceptions.
After determining a borrower’s income, lenders determine the maximum loan size based on a ratio of debt to income. The debt-to-income ratio is the percentage of a borrower’s monthly income that could go towards a mortgage and other forms of debt.
Traditional mortgages generally limit debt-to-income ratios to between 36% to 45%, depending on a borrower’s credit score and the size of their down payment. Bank statement lenders may allow borrowers to take on loans with debt-to-income ratios up to 55%, though the actual ratio will depend on the lender and a borrower’s other characteristics.
Bank statement loans allow borrowers to direct a larger portion of their income towards their mortgages, but these loans also require larger down payments. Borrowers with a great credit history may be able to purchase a house with a 10% down payment, but lenders may look for even larger down payments in some cases. By comparison, traditional mortgages allow down payments as low as 3%.
Bank Statement Mortgage Loans For Real Estate Investors
Another group that stands to benefit from alternative documentation methods are real estate investors. The law that governs income documentation only applies to mortgages for owner-occupied housing. That means that real estate investors may be able to take on mortgages for investment properties without providing any income documentation. Instead, select lenders will underwrite mortgages based on the expected income from the property.
Alternative underwriting standards for investor loans
Even if you’re a real estate investor, traditional lenders use your existing income to qualify you for a loan. Expected rental income is not counted when lenders issue traditional mortgages. Based on these qualification standards, real estate investors may struggle to find a loan.
However, these days not all lenders require investors to document their income. Ability-to-repay laws don’t apply to investors, so some lenders are starting to issue investment loans based on the expected returns of the property. These loans are called cash flow loans since lenders underwrite the loans based on the expected cash flow from the property.
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