More Common Than You Think: Bank Statement Loans

Looking for a loan but your W2 doesn’t reflect your actual wealth?  Work for yourself or own a small business and don’t have regular pay stubs?  This is a scenario that we hear about time and time again at A Nightmare on Loan Street Blog.  These are just some of the emails I’ve received lately:

“Phil, I own my own business, maximize my legal deductions, and don’t have much to report on my W2: what options do I have for a loan?”

“Phil, I don’t qualify for a QM (qualifying mortgage), so how can I buy a house?” 

“Phil, I’m a self-employed doctor/attorney/real estate investor, and I have money, but the bank won’t approve my loan application.”  

“Phil, pizza vs. french fries, who would win?”

Let me start by saying that french fries win.  Every.Single.Time.  Now that we’ve established that, I’d like to address the other questions from people who legitimately are emailing for help with loans and mortgages.  

Bank statement loans are a non-QM option that is far from subprime.  A lot of times people see non-QM loans and think that these are only for folks with foreclosures, poor credit, or have filed for bankruptcy in the past.  While this may be true of many non-QM loans, bank statement loans are a bit different.  Think of them as the Diet Dr. Pepper of diet sodas.  Most people think of diet sodas as something that taste terrible.  Not Diet Dr. Pepper - it tastes more like regular Dr. Pepper, and thus it is different than the other diet sodas out there.  

A bank statement loan might be a good option if you’re self-employed, have seasonal or irregular income (let’s say your income is typically based on commission vs. salary), don’t pay yourself much on your W2, or earn money from real estate.  It might be hard for a bank to approve a conventional loan based on the standard documents like tax returns and pay stubs.  They aren’t going to accurately reflect your true finances.  Enter the bank statement loan.

With a bank statement loan, lenders will use other available data to see the full financial picture.  Here’s what’s typically involved:

• 12-24 months of bank statements (can be personal, business, or a mix of both)
• Credit score - the higher the number, the better)
• Debt to Income ratio - to evaluate the existing debt you have and your ability to pay it
• Loan to Value ratio - how much you’d like to borrow vs. the price of the home
• P&L for your business
• Cash reserves  - to make sure you can pay the monthly loan payment if regular income dries up

Bank statement loans usually carry a higher interest rate since these loans carry more risk for the lender.  It’s fair to expect rates to be 0.5% to 1.0% higher than a conventional loan.  

So how long does it take for a bank statement loan to get approved?  This depends on how transparent the borrower is with the lender, and how prepared they are with the documents needed (see above).  If everything is in order, this loan can close in a month.  If there’s some back and forth, expect two months or longer.  

If you’re interested in getting started with a bank statement loan, you should contact the team over at Truss Financial Group.  They take a common sense approach to lending, and they’d be happy to talk to you about a bank statement loan.  

PS. Checkout this article from our friends at Bankrate regarding housing concerns with former inmates. 

Expanding on the topic of bank statement loans for self-employed individuals and small business owners, let's delve deeper into the intricacies and advantages of this financial solution, especially for those whose traditional documentation doesn't reflect their actual wealth.

Further Insights into Bank Statement Loans

A Lifeline for Non-Traditional Borrowers

Bank statement loans are a boon for non-traditional borrowers like self-employed professionals, freelancers, and small business owners. These loans acknowledge the unique financial scenarios of such individuals, where regular income documentation like W2s and pay stubs may not accurately represent their financial health.

Comprehensive Financial Assessment

Lenders analyze 12-24 months of bank statements, which can include both personal and business accounts. This comprehensive review allows lenders to get a holistic view of the borrower's financial situation, considering the fluctuations and seasonality common in self-employment.

Additional Documentation

Apart from bank statements, lenders may also consider other documents like Profit and Loss (P&L) statements, cash reserves, and the Loan to Value (LTV) ratio. These elements help in assessing the borrower's overall financial stability and the feasibility of the loan.

Credit Scores and Rates

While a higher credit score is always beneficial, bank statement loans often have more flexible credit score requirements. However, it's important to note that these loans typically come with higher interest rates due to the perceived increased risk for lenders.

The Approval Process

The approval time for a bank statement loan can vary. If the borrower is well-prepared with all necessary documents, the process can be relatively quick, potentially closing within a month. However, if there are complications or additional verifications needed, it could take longer.

Advantages of Bank Statement Loans

Reflecting True Financial Health

For many self-employed individuals, traditional income documentation doesn't accurately reflect their financial stability. Bank statement loans use real-time financial data, offering a more realistic picture of a borrower's financial health.

Higher Loan Amounts

Self-employed individuals might qualify for higher loan amounts with bank statement loans compared to traditional loans, as these are based on cash flow rather than taxable income.

Faster Processing

The processing time for bank statement loans can be quicker than traditional mortgages, as the underwriting process is streamlined with less reliance on traditional income documents.

FAQs on Bank Statement Loans

Q1: What exactly is a bank statement loan?

A1: A bank statement loan is a mortgage option for self-employed individuals where lenders use bank statements instead of traditional income documents to assess financial stability.

Q2: Who is the ideal candidate for a bank statement loan?

A2: Self-employed professionals, freelancers, and small business owners who have irregular or seasonal income and lack traditional income documentation are ideal candidates.

Q3: Are the interest rates for bank statement loans higher?

A3: Yes, typically, bank statement loans have higher interest rates than conventional loans due to the perceived higher risk.

Q4: What is the usual approval time for a bank statement loan?

A4: Approval times can vary, but with all documents in order, a bank statement loan can close within a month.

Q5: Can I apply for a bank statement loan with a moderate credit score?

A5: Yes, bank statement loans often have more flexible credit score requirements compared to traditional loans.

Q6: What documents are needed for a bank statement loan?

A6: You'll need 12-24 months of bank statements, P&L statements, details of cash reserves, and information about your Debt to Income and Loan to Value ratios.

Bank statement loans offer a flexible and viable alternative for those who might not qualify for traditional loans due to their unique financial situations. While they come with specific requirements and potential higher costs, they can be a powerful tool for self-employed individuals seeking to invest in property or fulfill other financial goals. Consulting with financial experts, like those at Truss Financial Group, is advisable to understand the best options for your specific circumstances.