For quite a while, self employed business owners have struggled to qualify for a mortgage. But thanks to a bank statement mortgage, buying or refinancing a house is much easier. These alt doc loans do not require tax returns or even signing a 4506T request for transcripts of tax returns. One option includes qualifying with 12 or 24 months of business bank statements. Additionally, self employed may use deposits from their personal bank statements as well. Many business owners find this to be a better option than stated income loans. In order to qualify for a bank statement home loan program, there are requirements to know. So, read further to learn more about this program’s advantages and areas to avoid.
Bank Statement Mortgage Loans Explained
Just because a business does not have strong tax returns showing huge profits, doesn’t mean it is not successful. There are many reasons where the bottom line makes it difficult to qualify for a mortgage. Examples include higher than normal expenses, new business, or it could just be a strategy to lower income taxes. Although a business that shows sufficient deposits into business or personal bank statements may qualify for any of the following: buy a home, cash out refinance loan, paying off a construction loan, and more. So, let’s dig into the details of how to qualify for a bank statement home loan.
- Who can qualify for a bank statement home loan
- Reasons for business and personal statement denial
- Bank statement mortgage loan rates
- Bank statement home loan guidelines
- Unique scenarios are possible
- Successful loan closings without tax returns
Who Can Qualify for a Bank Statement Home Loan?
Foremost, using a bank statement mortgage requires a self employed borrower showing at least 2 years in business. Being in business means anyone that can prove he/she is an owner of a business. Thus anyone that owns an LLC, S Corp, or sole proprietorship for at least 2 years could potentially qualify. Examples of borrower types include the following and more…
Borrower Type Summary
- Contractors or subcontractors – plumbers, electricians, builders, interior designers, & more
- Self employed truck drivers
- Employees paid by 1099
- Restaurant owners
- Professional services
- S Corp, LLC, or sole proprietorship
About any business type in existence for 2 years or more could qualify for our bank statement mortgage solutions.
Bank Statement Home Loan Guidelines
Besides being in business for 2 or more years, there are other guidelines to follow on the bank statement mortgage programs. Like all loans, the better the credit score and qualification, the lower the down payment and interest rates. Here are a few of the key guidelines for using bank statements to buy or refinance a home.
Bank Statement Loan Max LTV Examples
|Income Type||Credit Score||Max LTV|
|12 or 24 months business statements||700||90%|
|12 months personal statements||720||90%|
|24 months personal statements||700||90%|
|24 months business statements||600||85%|
|12 or 24 months personal statements||520||80%|
|24 months business statements||520||80%|
|12 or 24 months personal statements||500||75%|
|24 months business statements||500||75%|
The above are maximum LTV’s for scenarios and may vary based on overall qualification and details for the loan. Plus, there are other scenarios not shown and may change over time. Unlike traditional loans, exceeding 80% LTV does not require PMI on these bank statement mortgage loans. Even though higher credit scores allow lower down payment, this bank statement mortgage program is very flexible when it comes to low credit scores.
Major Credit Issues
Even if a borrower has major derogatory credit, there are potential solutions using a bank statement mortgage program. Examples of major derogatory items include…
- Chapter 7 or 13 bankruptcy
- Short sale or deed in lieu of foreclosure
- Up to 120 days behind on mortgage
Although 10% down payment and the best interest rate is not available for the above, there are solutions to get a bank statement mortgage. Each of the above areas could have recently settled and still qualify. That’s right! One day after foreclosure, short sale, or bankruptcy discharge! Although, other established credit reporting for 12 months is required. Also, mortgage debt must be current and non-mortgage debt must be brought current.
Additional Bank Statement Loan Requirements
- Maximum loan amount $3,000,000
- Minimum loan amount $50,000
- 50% debt ratio, exception to 53%
- Interested party contributions = 6% of sales price
- First time home buyers allowed
- Cash out up to $2,500,000
- Bank statement mortgage requires escrows for taxes and insurance
- Residency allowed: U.S. citizen, permanent resident alien, non-permanent resident alien, foreign national
- Asset reserves depends on the loan amount – ranges from 3 – 12 months of reserves
- Second home or investment property loan to value may be reduced compared to primary residence
Reasons for Bank Statement Loan Denial
Although it sounds pretty simple to qualify for these bank statement mortgage loans, there are some pretty firm rules. Since the business or personal bank statement deposits are being used for income qualification, overdrafts and nonsufficient funds cause issues. Lenders must prove the ability to repay the mortgage so too many OD or NSF’s hurts a borrower’s chances. Therefore, it is key to keep a positive balance at all times. If there are excessive overdrafts or NSF’s, the bank statement mortgage could be denied. Yet, there are some exceptions in these cases.
Another reason for denial is not able to prove ownership for at least 2 years. Proving business ownership and existence may be accomplished in several ways.
How to Prove Being in Business 2 Years
- Corporation or LLC Secretary of state filing
- CPA or tax preparer letter
What are the Bank Statement Mortgage Interest Rates?
If choosing the route of an alternative documentation loan, realize that the interest rates are higher than traditional full documentation loans. Thus, self employed borrowers which do not provide tax returns will pay a higher rate. Although, these interest rates are not gross interest rates and historically are still good rates. Typically, bank statement loan rates are one to several percent higher than conforming full documentation rates. Like any interest rates, there are influencing factors which increase or decrease the rate. In order to qualify for lower bank statement mortgage interest rates, here are a few tips.
Ways to Improve Bank Statement Loan Rates
- High credit scores
- Larger down payment or equity in home
- Lower debt to income ratio
- Shorter term bank statement mortgage
- Adjustable rate mortgage vs fixed rate
- On-time mortgage or rent history
- No major derogatory credit events (bankruptcy, foreclosure, short sale)
- Qualifying with 24 months of bank statements instead of 12 months
Business Owner Purchase Success Story
Recently, we closed a 10% down payment purchase for a business owner. Our client owns a restaurant and bar which has been open for over 2 years. Choosing the 12 month business bank statement mortgage program and having over a 700 credit score, 10% down payment was allowed. Therefore, the result was a new homeowner with just a 10% down payment, no proof of rent required, no mortgage insurance, and was well qualified using the last 12 months of business bank statements.
Success Story for a Bank Statement Cash Out Refinance
The bank statement mortgage program is also great for a refinance. Although typically not used for a rate & term refinance, it is a great tool for a cash out refinance. There are several reasons for receiving cash, but this client looked to buy out the other property owner. Primarily, the scenario involved the proof of income through personal bank statements. Another lender had referred the client to us because the borrower does not use a CPA for proving that the business exists. Instead the business owner uses a tax preparer.
Fortunately, our bank statement mortgage guidelines allows for a tax preparer to supply a letter proving the business exists. Key points that must be verified through the letter include…
- Ownership percentage of business
- How long in business
- How long the relationship existed between tax preparer and business owner
- Other requirements may exist depending on the scenario
In the end, the homeowner was able to buy out the other property owner using personal bank statements and the tax preparer’s letter, no mortgage history, and over 700 credit score. This all resulted in an ecstatic homeowner and client!
Full Documentation Self Employed Solutions
Just because someone owns a business does not mean a traditional mortgage is not available. There are a ton of solutions out there and we would love to help you find one. These include no money down programs such as USDA, VA loans, and loans combined with down payment assistance. Furthermore, there are great programs such as FHA and conventional loans. Even construction loans are available for self employed borrowers reporting sufficient income on tax returns.
So, what is sufficient income? That depends on the borrower’s scenario such as level of debt, credit score, down payment, and more. Contrary to belief, there are some very flexible home loans available today. It is possible to get approved with one year of tax returns or even debt to income ratios up to 50% and maybe more.
If you are a business owner and wondering about a building, buying, or refinancing a home, let us help!