Breaking Down Bank Statement Mortgages

Primary Insights

  • Bank statement mortgages let you qualify based on bank statements rather than the conventional tax returns, a boon for the self-employed segment.
  • Such loans are not universally available across all lenders, necessitating a potential collaboration with a mortgage broker.
  • If you’re eligible for a traditional mortgage, it’s often the preferable route.

 

For freelancers or those with unconventional employment structures keen on homeownership, bank statement mortgages could offer a way forward, allowing eligibility based on bank statements over tax returns.

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Delving into Bank Statement Mortgages

A bank statement mortgage, sometimes termed a “stated income loan,” bypasses the need for customary financial documentation like W-2s or tax returns during the mortgage process. Instead, bank statements validate income. This proves invaluable for professionals with fluctuating incomes, non-traditional payment structures, or substantial tax deductions. The archetype borrower might be a small business owner, attorney, physician, or property investor.

Consider a scenario where a person’s tax returns indicate earnings of $100,000, but their actual income was $200,000 due to a hefty deduction for equipment. In such cases, bank statements offer a truer reflection of one’s financial health than tax returns, opines Brad Seibel of Sage Mortgage.

The Non-QM and Bank Statement Loan Correlation 

Bank statement loans, since they are perceived as riskier, aren’t commonplace offerings among financial institutions. Their categorization as non-qualified mortgages (non-QM) implies they lack endorsement from Fannie Mae and Freddie Mac, translating to diminished safeguards for both lenders and borrowers.

Non-QM loans encompass any mortgage falling outside the prescribed norms of Fannie and Freddie, which dictate parameters like loan quantum and debt-to-income ratios.

Despite their heightened interest rates, non-QM loans open up borrowing avenues for a broader spectrum of individuals.

Bank Statement Mortgage Mechanics 

Applying for a bank statement mortgage entails a slightly distinct protocol compared to its traditional counterpart. The documentation phase demands bank statements, often spanning up to two years, and may encompass both personal and business accounts.

Lenders will seek insights into the business nature, employee strength, and physical presence to gauge the expense element.

Upon furnishing the requisite documentation, lenders evaluate your earnings to understand your net income, forming the cornerstone for loan pre-approval.

Understanding Bank Statement vs. Traditional Mortgages 

While bank statement loans cater to those with non-conventional income streams, traditional mortgages cater to salaried individuals with consistent, verifiable income, usually demonstrated via pay stubs, W-2s, and tax returns.

Bank statement loans might stipulate heftier down payments. Whereas traditional loans might suffice with a mere 3%, bank statement loans usually start from a 10% baseline.

Who Should Opt for a Bank Statement Mortgage? 

Entrepreneurs, freelancers, and gig economy participants emerge as prime candidates for bank statement loans. Full-time property investors, too, might lean towards such loans based on their portfolio-generated revenue.

Navigating the Bank Statement Loan Landscape 

If your current mortgage partner doesn’t proffer bank statement loans, roping in a mortgage broker might bridge the gap. Brokers, given their expansive network, can introduce you to a plethora of unconventional mortgage offerings.

Is a Bank Qualification Loan Right for You?

If your bank statements portray a more accurate financial picture than tax returns, a bank statement mortgage might resonate. However, many self-employed individuals often qualify for conventional mortgages. As these traditional avenues lack the disadvantages intrinsic to bank statement loans, exhaust these options before venturing into bank statement mortgages.