what is a bank statement loan?

Back in high school, CliffsNotes were all the rage.  They provided a summary of books so you got the gist of what’s going on without reading the entire thing.  Teacher assigned The Merchant of Venice?  No problem, I had the CliffsNotes read by the end of homeroom, then aced the test.

In turn, I’d like to offer you my version of CliffsNotes for bank statement loans.  Don’t worry, we aren’t going to leave anything out, but we’ll keep it nice and efficient.  

What is a bank statement loan?

A bank statement loan, or no-doc loan, is a loan that uses bank statements to verify a borrower’s income.  

Who can benefit from a bank statement loan?

Anyone who can’t tell their financial story through tax returns or W2s.  Conventional loans require these documents, but if you’re self-employed, maximize your legal deductions, and don’t pay yourself much on your W2, it may be hard to qualify for a conventional loan.  

How is a bank statement mortgage different from a conventional mortgage?

A bank statement mortgage is a non-qualifying mortgage, and this means that it doesn’t have to follow the same rules as a qualifying mortgage (e.g. conventional loan).  You may have seen the terms “QM” and “non-QM” - this is qualifying mortgage and non-qualifying mortgage.  The upside is that this means that there’s more flexibility from lenders, and borrowers can find options that suit their needs.  Keep in mind that interest rates may be 0.5% to 1% higher on a bank statement mortgage.

Is my credit score involved?

In short: yes.  Here’s how:

• Lenders will likely look at your credit score.  Some lenders will work with scores as low as 500, but this will vary
• Your credit score will likely impact how much you can borrow.  If you’ve seen the term Loan to Value (LTV) ratio, this means the percentage of the loan compared to the value of the house
• Your credit score will impact your Debt to Income (DTI) ratio.  This ratio is expressed as a percentage and reflects the amount of debt you have compared to your income.  Many lenders allow for 50% or greater, but the lower the better

Anything else?

Lenders may want to see three to six months’ worth of mortgage payments in reserve in your bank account.  These loans carry more risk for the lenders, so they look for other ways to verify your income since the W2 and tax return aren’t part of the process.

While bank statement loans are certainly not for everyone, they offer an option if you have nontraditional income, seasonal income, sporadic income, or own a small business and can’t get qualify for a conventional mortgage.

That’s how you summarize, friends.  You can easily read this during homeroom and ace the test.

*Note: there is no test.