If you’re self-employed, take significant tax deductions, or have inconsistent income, qualifying for a mortgage loan could be more complicated than for others. Banks want to know that you’re not a risk and use your tax records and other documents to ensure you have the means to repay the loan, but what can you do when your tax records don’t show an accurate picture of your finances?
A bank statement mortgage might be a solution. Bank statement mortgage loan requirements eliminate the need to prove your income using tax returns and allow you to utilize your bank statements to show your ability to repay. In this post, the Champions Mortgage experts delve into the specifics of these loans and how they make it possible for business owners and other qualified buyers to get a mortgage or a cash-out refinance in Texas.
What Is a Bank Statement Loan?
Anyone who has ever applied for a mortgage loan or is going through the process of borrowing money to buy a new home knows that getting your financial house in order before shopping is a critical step. This means demonstrating a steady income, a good credit history, and minimal debt.
If you’re self-employed, proving your worthiness when applying for a traditional mortgage can be more challenging since your income may not be as consistent as lenders prefer, and your tax records may not prove your income or your bank balance. In this case, a bank statement mortgage may be an option to help you purchase a home. Not all lenders offer these loans, so it’s best to work with a mortgage broker who can assist you in exploring alternatives and finding the right solution.
At its core, a bank statement mortgage loan eliminates the need to produce tax documents and allows you to submit your bank statements instead as proof of income.
How does this help? Suppose, for example, you take significant tax deductions to purchase expensive equipment for your business. Your tax return will show a much lower income than your company actually has, which will affect your ability to secure a loan.
Using your bank statements can show a higher income than the tax documents reflect, but that doesn’t mean this type of mortgage loan is ideal. In fact, if you can qualify for a conventional mortgage, that will almost always be a better option. Banks view bank statement mortgages as riskier than traditional loans because they don’t have the backing from Fannie Mae or Freddie Mac, which means they have higher interest rates and cost more to borrow.
These loans also lack some of the consumer protections that keep the cost of a traditional mortgage manageable. It’s common, for example, for a bank statement loan to have a balloon payment, prepayment penalties, or negative amortization. Hence, borrowers must carefully consider the total cost and potential implications of borrowing this way before taking the loan.
The General Requirements for Bank Statement Mortgage Loans
Other than allowing borrowers to use alternate income documentation, the application process and bank statement mortgage loan requirements align with those for a conventional mortgage.
The lender will ask for documentation of your business income and expenses and use that information to determine your net income. Factors like the number of employees, physical location, and type of business will influence this analysis. If your net income meets the requirements after accounting for your business expenses, the bank will pre-approve your application up to a certain amount.
These loans may also require a downpayment of at least 10%, though depending on your credit score, you may need to put more down. The higher your score, the better the loan terms and the lower the interest rate. Other bank statement mortgage loan requirements include:
- Two years of bank statements from the same bank
- Proof that your business has been in operation for at least two years, including business licenses and organization documents
- Profit and loss statements for your business
- A debt-to-income ratio of at least 45%
- A credit score of at least 620
- Adequate cash reserves
What Lenders Look for When Analyzing Bank Statements
When applying for a bank statement loan to purchase a home, lenders will scrutinize your bank records to secure proof that you have the means to repay the loan. The statements provide a detailed view of your expenses and how much money is coming in. In addition to showing how much money you have coming in, when, and from what sources, a bank statement offers a window into your spending habits and overall financial stability.
Ultimately, the bank statement review aims to confirm that you’ll have adequate funds to repay your mortgage after covering other expenses. It’s crucial that you review statements before submitting them to the lender to ensure the information is accurate and doesn’t contain any potential red flags that could impact your ability to get the loan.
Work With Champions Mortgage To Explore Your Home Loan Options
If you own a business, are a gig worker, or otherwise have an inconsistent income that makes qualifying for a conventional home mortgage difficult, a bank statement mortgage loan could be the solution to your homeownership woes.
Champions Mortgage can help you make sense of all your mortgage options, including traditional, FHA, VA, and other loan types, to ensure you get the best financing at the best rate. Our experienced team can walk you through all the bank statement mortgage loan requirements and explain everything you need to know about the mortgage qualification process, down payments, and closing costs on a home to make the process as straightforward and streamlined as possible.
Get answers to all your questions and start your journey to being a homeowner by getting in touch with Champions Mortgage at (281) 727-2500 to set up an appointment with one of our brokers. We’ll help you find the right loan at an unbeatable rate and walk you through the process from start to finish.
