Loans for Self-Employed Individuals
Self-employed individuals have always had a hard time getting a mortgage. Most lenders like to see income in steady, scheduled payments, and self-employment income is anything but that. If you’re self-employed, one option that you have is bank statement loans.
What Is a Bank Statement Loan Program?
A bank statement loan program is a type of mortgage that uses your bank deposits as income versus traditional proof of employment. Bank statement loans are different from conventional loans that look mainly at paystubs, W2s, and tax returns.
Many business owners have the problem that they can easily afford a mortgage but don’t have the income on paper to prove it. You may have been very aggressive with your business expenses and other tax deductions. That can reduce your net income on your tax returns, not indicative of your actual cash flows. Since you’re not an employee, you also don’t have pay stubs to fall back on.
How Are Bank Statement Loans Different from QM Loans?
A QM loan, or Qualified Mortgage loan, is a traditional mortgage. Employed borrowers qualify by showing their pay stubs, W2s, tax returns, credit scores, and assets (bank accounts, 401Ks, etc.) Qualified mortgage in this context isn’t restricted to mean employed mortgage. A self-employed person might qualify for a mortgage with the standard requirements. The problem is simply checking all of the boxes.
The main difference in applying for a bank statement loan is that your bank statements are used in lieu of tax returns, pay stubs, and W2s. Maybe the mortgage you’re applying for requires at least $60,000 in annual income, but you don’t show that amount on your tax return. You do have $5,000 in deposits per month coming into your bank accounts. The lender can qualify you based on that bank activity.
How Do You Apply for a Bank Statement Loan?
You will usually need to show 12 or 24 months of bank statements to qualify. This shows your lender that you have good cash flow over time, even if some months are higher than others.
The mortgage lender will usually want to check both your personal and business bank statements. The reason for checking business bank statements is to see where your money is going. If you have to pay monthly business rent, the lender will usually subtract that from your available cash since you wouldn’t be able to use that money to make mortgage payments without going out of business. If your tax return income was lower because of discretionary or one-time purchases, the lender might add that cash back since you could temporarily stop that spending if you needed to pay your mortgage.
What Additional Requirements Are There for a Bank Statement Home Loan?
If you’re trying to buy a home, one of the most important requirements is still going to be having a good credit score. The lender wants to see that you can responsibly make your payments on time. Your credit score is just as important as your deposits with a bank statement loan. That’s because the lender is already using an alternative way of verifying your income.
In addition, the lender will want proof that you’re actually in business. They don’t want to lend to people who set up other bank accounts and transfer money to inflate their income. You might need to show a business license or professional certification. If you don’t need one, the lender might ask for 1099s, invoices, or some other proof of self-employment.
What Are the Down Payment Requirements?
There is no set down payment requirements for bank statement loans. Some lenders will always want a higher down payment than a traditional mortgage. Others are more flexible depending on your income and credit.
Keep in mind that you are not applying for a traditional real estate loan. So if you’ve looked at things like FHA loans or first-time buyer programs, those down payment requirements generally won’t apply.
Do You Need to Show Proof of Assets?
Some lenders may ask for proof of assets. Again, this varies by lender. It also varies based on the loan you’re asking for and how well qualified you are.
Assets help mortgage lenders evaluate self-employed borrowers in two ways. First, they show you have the money you can rely on if business slows down. Second, building up assets proves that you can make financially responsible choices and aren’t simply wasting the cash you earn.
Is a Bank Statement Loan Always the Right Choice?
Which type of loan you use depends on your situation. Many self-employed borrowers can still qualify for traditional mortgage programs that may or may not have better rates, lower down payments, or other beneficial terms. It would be best if you looked at all of your mortgage options to see what’s best for you.
For example, let’s say you qualify for a conventional mortgage, but your taxable income is just barely above the minimum while your bank statement income is much higher. The traditional mortgage lender may evaluate your loan as riskier. That could increase your interest rate or down payment. Since you look better qualified to the bank statement loan lender, they might offer you better terms. Blake Mortgage connects you with a wide variety of mortgage options. Whether you’re worried about qualifying or want to make sure you’re getting the best deal, we can help. Give us a call or make an appointment to learn more.