The Self-Employed Borrower's Guide to 12-Month and 24-Month Bank Statement Loans

In the realm of non-traditional mortgage lending, bank statement home loans have emerged as a beacon of hope for a diverse group of borrowers, particularly the self-employed, freelancers, and those with irregular income streams. These loan programs eschew the conventional income verification methods in favor of analyzing personal or business bank statements to assess a borrower's income. Among these, the 12-month and 24-month bank statement loans are the most prevalent, each with its unique features, benefits, and considerations. This blog delves into the nuances of these two loan types, helping you understand which might be the best fit for your financial situation and homeownership goals.

Understanding Bank Statement Loans

Before we dive into the specifics of 12-month versus 24-month bank statement loans, let's clarify what a bank statement loan is. Traditional mortgages require W-2 forms, tax returns, and pay stubs for income verification. However, for those with non-traditional income, these documents may not accurately reflect financial stability or cash flow. Bank statement loans, therefore, use deposits shown in bank statements to calculate income, offering a viable mortgage solution for non-W-2 earners.

12-Month Bank Statement Loans

Overview

12-month bank statement loans require the borrower to provide one year of bank statements to verify income. This shorter timeframe can be advantageous for borrowers who have recently seen an increase in income or who may have had a few off months more than a year ago.

Pros

• Recent Income Emphasis: This loan type is ideal for those who have seen a significant uptick in their income in the last year, as it focuses on the most recent 12 months of financial activity.
• Faster Preparation: Gathering 12 months of statements is inherently less cumbersome than compiling 24 months, making the application process slightly quicker and less daunting.
• Flexibility: Some lenders may offer more favorable terms for 12-month bank statement loans, recognizing the borrower's recent financial success.

Cons

• Higher Scrutiny on Shorter History: With only a year of income to review, lenders might scrutinize the provided statements more thoroughly, looking for consistency and stability in monthly deposits.
• Potentially Higher Rates: Due to the perceived increased risk of lending based on a shorter financial history, interest rates for 12-month loans may be slightly higher compared to their 24-month counterparts.

24-Month Bank Statement Loans

Overview

24-month bank statement loans, on the other hand, require two years of bank statements. This longer period provides a more comprehensive view of a borrower's financial health, potentially benefiting those with fluctuating incomes.

Pros

• Comprehensive Income Picture: A two-year history offers lenders a broader perspective on a borrower's financial stability, especially beneficial for those with seasonal businesses or variable income.
• Potentially Lower Interest Rates: The extended financial history can lead to more competitive interest rates, as lenders perceive a reduced risk when they have a more complete income picture.
• Greater Lender Confidence: The thorough income documentation over two years can increase a lender's confidence in the borrower's ability to repay, possibly leading to better loan terms.

Cons

• More Documentation: Naturally, gathering 24 months of bank statements demands more time and effort, which can be a deterrent for some borrowers.
• Older Income Data: For borrowers whose income has significantly increased in the more recent past, a 24-month requirement might dilute the impact of their current financial standing.

Choosing Between 12-Month and 24-Month Bank Statement Loans

When deciding between a 12-month and a 24-month bank statement loan, consider the following factors:

• Income Stability and Trend: If your income has been consistently rising and you want to capitalize on your most recent earnings, a 12-month program might be more advantageous. Conversely, if your income fluctuates or if you had a particularly strong year out of the last two, the 24-month program could present a more stable income picture to lenders.
• Preparation and Documentation: Assess your willingness and ability to gather the necessary documentation. If the idea of compiling two years' worth of statements is daunting, and your recent income supports it, a 12-month loan could be the way to go.
• Interest Rates and Loan Terms: It's crucial to compare the interest rates and loan terms offered under both programs. Sometimes, the slightly higher rate of a 12-month loan might be worth it for the convenience and potential to capitalize on recent income improvements.

Conclusion

Bank statement loans offer a flexible path to homeownership for non-traditional earners, with both 12-month and 24-month options providing unique advantages. The choice between them hinges on your individual financial situation, your income stability and trend, and your personal preferences regarding loan application preparation. As always, it's wise to consult with a mortgage professional who can offer personalized advice based on your financial scenario. By understanding the nuances of these loan types, you can make an informed decision that aligns with your homeownership aspirations and financial goals.