How Do Bank Statement Mortgages Work?
Bank statement mortgages are one of the better (and more available) options for self-employed individuals looking to secure a home loan. The basic idea is pretty simple: lenders allow borrowers to use bank statements as proof of income, as opposed to other, more traditional methods of verifying income (like tax returns, pay stubs, etc.). This is great for self-employed people, freelancers, contract workers, and so on - because it allows a lender to look at several years of income to determine an average, even if your month-to-month documentation shows large fluctuations in money earned.
The basic idea is straightforward, but the actual mechanics can be a bit confusing. First, it's important to understand that bank statement mortgages are not categorized as "qualified mortgages" -- which means that they aren't strictly subject to the rules and regulations of traditional mortgages. This means that the lender can determine many of their own standards, rates, and requirements. With that in mind, it's tough to provide an accurate, detailed description of how a bank statement mortgage will look for you. The answer to nearly any question is going to be: "it depends on the lender." Still, there are a few general requirements you should prepare for - regardless of how specific lenders handle them. Like any other mortgage, lenders are going to look at your credit score and debt-to-income ratio, as well as the income documentation you provide with your bank statements. While requirements will vary from lender to lender, it's important to remember that these non-qualified mortgages tend to pose more risk to the lender, so your credit score and DTI should probably be in great shape if you plan to apply for a bank statement mortgage. If your credit score isn't very high, it doesn't mean you can't qualify... But your home loan may come with higher rates and fees, as well as a larger down payment. It's a good idea to have 24 months worth of bank statements, though some lenders only require 12. The larger span of time you can cover, the easier the lender can determine and verify your average monthly income. A few other things to consider: • If you're a business owner, you'll likely need your own personal bank statements, as well as profit and loss (P&L) statements and/or bank records for the business. • Lenders offering bank statement mortgages will also be looking for overdrafts or penalties for insufficient funds. These don't automatically disqualify you, but the lender will likely have a limit for how many they allow. • Many bank statement mortgages require the homebuyer to have "borrower reserves" - that is, a reserve of money to cover mortgage payments. Some lenders will require three to six months of payments on reserve. Be sure to ask about this part of your loan! • Interest rates for these types of loans are usually higher than other, more standard mortgages. It doesn't have to be a dealbreaker, but is certainly worth keeping in mind as you shop around. Again, each lender is going to have a different set of requirements, terms, and rates. It's always a good idea to gather as much information as possible, and do some shopping around for the bank statement mortgage terms that will work best for you. To prepare, you can build or rehabilitate your credit score, concentrate on saving for a down payment and reserve requirements, and get all of your bank statement information in order. These types of loan can make all the difference for nontraditional employees looking to buy a home, but understanding what to expect - and taking steps to prepare yourself financially - will make a big difference in having a smooth, well-informed experience.