What is a bank statement loan?

What is a bank statement loan

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What is a bank statement loan?

A bank statement loan also called a self-employed mortgage is a mortgage loan considered an alternative loan. The reason for this is because traditional mortgage loan documents that would be required to secure the loan like your W-2s or paystub‘s or other documents may not be required for this kind of loan.

Bank statement loans offer a new flexible wait for people to qualify for loans.

Today with the rise of alternative jobs like gig work and related careers, it can be more challenging for people to qualify for loans so banks started offering these alternative loans called bank statement loans.

How do bank statement loans work?

With bank statement loans applicants use their bank accounts to validate their income and cash flow.

So while a traditional mortgage loan would require tax statements and other income documents, these are not required for a bank statement loan.

So it offers some flexibility in qualifying for lending however documents are still required and you will still have to meet other loan requirements like a minimum credit score, enough liquid reserves, possibly a business license and other requests that the bank may have.

It will vary from lender to lender so keep that in mind.

As you can imagine, bank statement loans carry more risk the traditional mortgages so to account for this higher level of risk you can expect to get a higher interest-rate compared to traditional mortgage.

Applicants are usually ok with this trade-off considering they may not be able to qualify for a traditional mortgage loan in the first place. You could always start off with a bank statement loan and then refinance into a traditional mortgage later on in the future.

Who is a bank statement loan for?

For people who may have difficulty qualifying for a traditional mortgage loan, a bank statement loan can be a solution.

This is for people who might have high cash flow or strong bank statements but may lack in other areas like they may be new to their business or have slightly challenged credit.

Business owners like freelancers, consultants attorneys, investors, agents and other small business owners are likely candidates for bank statement loans. Maybe you just started your entry-level digital marketing job or you’ve been in business less than two years, whatever circumstance, bank statement loans may be a viable option for you.

This is because they might encounter some difficulty when trying to obtain traditional mortgage loan documents so this loan program can be a solution for them.

Advantages of bank statement loan program

  • Traditional bank mortgage loan documents are not required
  • Lower credit thresholds
  • Higher DTI (debt-to-income) ratios

Disadvantages of bank statement loan program

  • Higher interest rate

So, advantages of a bank statement mortgage loan include higher loan limits and less stringent requirements for qualification like a higher debt to income ratio and using bank statements to qualify instead of other documents like paystubs.

Bank statement loans can also be used to buy primary homes, second homes, and investment properties.

Then of course the main drawback is a higher interest-rate. To compensate for the higher risk you may be asked to put more money down as well, as much is up to 30% down depending on the lender.

And bank statement loans are an  alternative form of financing so they are not offered everywhere and they are not available by every lender.

Are bank statement loans still relevant today?

Bank statement loans are still relevant today, particularly for self-employed individuals or small business owners who may have difficulty providing traditional income documentation.

As mentioned above, these types of loans use bank statements to verify income instead of pay stubs or tax returns, making them an option for those who may not have traditional forms of income documentation.

However, they generally have higher interest rates and less favorable terms compared to traditional loans.

Is a bank statement mortgage loan worth it?

It can be worth it.

It really depends on the personal situation of the borrower. If there are no options to buy a house other than a bank statement loan then this may be a good short term solution until you can secure a traditional mortgage loan which promises a lower interest-rate which can lower your monthly payment.

And if you consider the alternative which is either not buying the house or paying cash for the house which requires a lot of cash upfront then bank statement mortgage loan does not seem that bad. They’re actually a very viable option for many borrowers.

You can look at renting versus taking a bank statement to see which would be the better opportunity for you.

With renting you’re basically contributing to paying someone else’s mortgage loan.

It’s kind of like throwing away money.

So take the cost of your monthly rent and multiply it by the number of months that you may have to have a bank statement mortgage loan before you can refinance it to traditional loan.

With that number then take the difference in interest you would pay between distinct steam and loan and traditional loan and multiply it by the  Time for you to get into a traditional loan and compare this number to the previous number. Which ever number is higher is going to be the more costly option.

So it might be right or it might be that statement loans go with option that’s cheaper for you or maybe not. Sometimes it’s not all about money at the end of the day and happiness really outweighs all.

How to find a bank statement loan?

Bank statement loans or non-qualified mortgages can be tricky to find. Not all banks offer them and to get started I would recommend contacting your own personal bank just to see if it’s an option that they offer.

And if it’s not something they offer, ask if there’s a company they recommend or an alternative that they talk to their customers about or that their customers have used for a mortgage loan.

You can also look at trying to find a mortgage lending company that specializes only in mortgage loans. Those types of financial institutions offer a variety of different mortgage loans including banks statement loans.

Other than that you can do a thorough search online looking at Google and other search engines.

You can also look at joining forums and groups online like Facebook groups that talk about bank statement loans or mortgage options for business owners or self-employed people.

Do you need a bank statement?

Yes, you will need a bank statement for a bank statement loan.

That’s the whole thing behind bank statement loans.

The mortgage lender is looking for proof that you can support paying for mortgage payments and so the last for your bank statement. Getting a bank statement is usually a pretty simple process and your bank probably already sends this to you monthly anyway whether you get them mailed or online.

And if you don’t, it’s as simple as a phone call or email to your bank can get you your last three months or however many past bank statements you need.

What are bank statement mortgage loan rates?

Bank statement mortgage loan rates are higher than traditional mortgages, no doubt.

This is because bank statement mortgage loans are considered more risky than regular mortgages. You’re going to find that their requirements are a little more lenient and to compensate for that risk, you’ll find rates around 6% to 8% depending upon the market. If you compare that to mortgage rates today which are at 2.5 to 4% or so, you can see that it’s a bit higher.

Should this scare you away?

Maybe but also consider that you don’t have to have your bank statement mortgage loan forever and many people will often refinance into a traditional mortgage when the time is right.

Here’s an example of when this scenario might make sense.

An example of a scenario where a bank statement loan might make sense

Consider you are self-employed and you’ve been with your business for 13 months.

You’re making good money earning $150,000 per year as your salary and you have a family of four which includes you, your partner and two kids. Your partner is a stay at home parent and they are not working.

You’re looking to buy a house and you’re finding that banks are requiring you to have two years of self-employed history before they can consider your income from your employment.

So that means if you apply for a mortgage loan, since you have less than two years of self-employed history you cannot use your self-employed income on the loan application.

So without your self-employed income on the loan application you have to consider other kinds of income you may be able to use to qualify.

Since your partner does not work and you don’t have any other income streams coming in, the loan application would have zero income and so it would likely be declined.

So what can you do?

You can look at a bank statement mortgage loan possibly.

A bank statement mortgage loan looks more heavily on your income flow and so 13 months in your business with $150,000 salary may work for this type of loan.

In the end you get what you want, which is a house that you can buy with a non-traditional mortgage, the bank statement mortgage loan.

You compromise with the higher interest-rate you receive in exchange for being able to buy a house now rather than wait another year for you to have two years of history which is required from more traditional mortgage types.

And then later down the road once you meet the time in self-employed requirement, you can refinance for a traditional mortgage loan which will likely help you reduce your interest-rate and may also lower your monthly payment.

Are bank statement loans right for you?

This type of mortgage loan may be right for you depending on your situation. As with everything you should weigh the pros and the cons and see what falls more in your favor.

Sometimes it’s just better to wait until you can get past that hurdle that’s making it tough to qualify for traditional mortgage and then just get that later down the road. But bank statement loans can be a fit for people that need a mortgage loan right now so it is an option.

How to get a bank statement loan?

You’ve done your research and due diligence and you’re ready to take the plunge and get a bank statement loan.

So how do you do it?

First, find a mortgage lending company that offers bank statement loans. Review the terms thoroughly and if it’s a good fit for you move forward with the application.

During the application process you’ll be asked questions about your income and employment. You will be asked other questions as well and as you’re getting qualified you’ll get your credit checked and go through some of the other procedures required for a traditional mortgage loan.

From here the process may vary from bank to bank depending upon who you get your loan from.

What do you think?

I hope this has answered some questions about alternative mortgage loans. If you have any questions about bank statement loans, comment below and I’ll do my best to help.

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Jenn Leach, MBA

Jenn Leach is a Houston-based MBA with over a decade of experience in the banking industry. She writes at Millennial Nextdoor where she writes finance, money, business, and lifestyle content to help millennials create additional income streams online. Join her on Substack at https://jennleach.substack.com.

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