You may have read the title of this blog post and thought “how is that possible?”. If that’s you, you likely remember that stated income loans were one of the culprits of the housing market collapse in the early 2000s. Basically, lenders were taking the income stated on the application and being like “I believe you”. No paperwork, no documentation, no double checking. Just handing out loans on the honor system. That obviously didn’t work too well because a lot of borrowers defaulted on their loans because they couldn't afford the houses they were buying.
The Dodd-Frank Act of 2010 put some guidelines in place for lenders, and while stated income loans are not what they used to be, there’s a new and improved version of them available today. If you’ve ever heard of the term “bank statement loan”, that’s another way these are known. Other options that were tossed around before settling on the term “bank statement loan” were: “we’ll double check this time loan” and “show me your money loan”. They didn’t have quite the same type of clarity and ring as “bank statement loan”, so here we are.
Unfortunately, one of the drawbacks from the Dodd-Frank Act of 2010 is that it created quite the pickle for the self-employed. You know, people like accountants, real estate agents, independent contractors, singers, actors, writers, and other types of small business owners. These folks often don’t have as much on their W2 because they are maximizing their legal deductions. They also don’t always get a steady paycheck. This makes qualifying for a conventional loan from a big bank pretty tough.
That’s why it’s important for the self-employed to learn about bank statement loans. Bank statement loans can be used to purchase a house, but the lender reviews different financial information to determine approval. Here’s a short list of what you can expect:
- Bank statements - as the name of this loan implies, bank statements are used as part of the approval process for bank statement loans. Lenders will use 12-24 months of bank statements as a way to see an average monthly income. This is usually the sum of the deposits divided by the time period of bank statements (12-24 months). By looking at deposits this way, it gives the bank a way to determine if the borrower has enough revenue to support the loan
- Credit score - similar to a conventional loan, a borrower’s credit score is checked. However, bank statement loans will typically allow a lower score to still qualify. Most lenders are looking for a number of 600 or higher
- Debt to Income Ratio - the lender is looking to see what percentage of your income is already going towards existing debt. This is things like student loans, credit card bills, and car payments. Again, the lender is looking to ensure the borrower can repay the loan
- Down payment - this is usually 10-20% for a bank statement loan
If you’re self-employed or run a small business and were not approved for a conventional loan through one of the big banks, a bank statement loan might be a good option. I’d recommend giving the experts at Truss Financial Group a call. They take a common sense approach to lending and specialize in bank statement loans. This is their jam, and they’d love to help you learn more.