Bank statement loans are harder to find
The home loan process looks a little different when you have self-employed income.
Self-employed borrowers sometimes have to consider bank statement loans, which let you qualify based on bank statements rather than tax returns.
This is a great way to get approved for a loan if you don’t have traditionally-documentable income. But not all lenders offer bank statement mortgages — and it can be harder to find a low mortgage rate.
There are still good deals to be had for self-employed mortgage borrowers. You just might need to search a little harder to find them.
Find a bank statement loan (Feb 1st, 2021)
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How to find bank statement loans
Not all lenders offer bank statement loans. So your options might be narrower than someone applying for a ‘traditional’ mortgage or refinance.
Below we list a few mortgage lenders that explicitly offer bank statement loans.
However, you shouldn’t limit your search to these companies.
A lender might be perfectly happy to approve loan applications based on bank statements — even if it doesn’t advertise ‘bank statement loans’ or ‘non-QM loans’ on its website.
So if there’s a mortgage lender you’re interested in, it’s worth reaching out to ask about its lending requirements.
You’re likely to have more luck with a non-bank mortgage lender or a credit union. Big-name banks are typically less keen to offer non-QM products.
The wider you cast your net, the more options you’ll have for comparing loan terms and interest rates.
Just because you’re self-employed, doesn’t mean you can’t shop around and find a great mortgage deal like everyone else.
Find a low-rate bank statement loan (Feb 1st, 2021)
A few bank statement loan lenders
If you’re already eyeing some mortgage lenders, ask whether they can approve you based on your bank statements. As we said, not all lenders advertise the fact that this is an option.
If you’re not sure where to start looking, we’ve compiled a list of lenders that do explicitly state they’ll approve bank statement loans.
As always, you should compare at least 3-5 loan offers to make sure you’re getting the best terms and lowest mortgage interest rate available to you.
Each self-employed mortgage lender is listed next to its Better Business Bureau (BBB) rating, which run from F to A+.
- A & D Mortgage — A+
- Athas Capital Group — A+
- First National Bank of America — A+
- Griffin Funding — A+
- HomeLife Mortgage — A+
- Luxury Mortgage — A+
- New American Funding — A+
- NewRez — A+
- North American Savings Bank — A+
- NorthStar Funding — A+
- NP, Inc — A+
- Paramount Residential Mortgage Group (PRMG) — A+
- Caliber Home Loans* — A
- Fidelity Home Group — A
- Mortgage Equity Partners — A
- AmeriSave — B+
- Sprout mortgage — B
*Caliber Home Loans doesn’t include bank statement loans in its official portfolio. But at least one of its loan officers says they can originate them
If none of those is able to help you, cast your net wider. There are plenty of other lenders of bank statement loans that didn’t make our list.
Do your due diligence as a mortgage shopper
Understand that this is not a list of the ‘best’ mortgage lenders. Rather, it’s a list of lenders that definitely do bank statement loans — a place to get started.
It’s up to you to check out the companies that make your shortlist.
Run internet searches for regulator actions and customer reviews to get a pulse on how reputable a lender is.
Federal regulator the Consumer Financial Protection Bureau also maintains a consumer complaint database that you can search by company name to see if any official complaints have been filed.
Note, most companies have at least a few complaints, so this shouldn’t be a deal-breaker. But look at the reasons for the complaints to see if there are serious red flags.
Remember, you can always walk away
Bank statement loans are a type of ‘non-qualified’ or ‘non-QM’ mortgage.
‘Non-QM’ means a loan doesn’t meet the ‘qualified mortgage’ standards for most conventional loans. Since bank statement loans do not use traditional income verification, they fall into this category.
Non-qualified mortgages are less regulated than most other mortgage loan programs. So you won’t get some of the consumer protections that apply to other loan types.
That means you need to make sure the lender you choose is reputable and that you fully understand the mortgage agreement you sign.
If you’re in any doubt over any issue, keep looking or seek professional advice.
Remember, a home loan agreement is not binding until you sign the final closing papers. So if anything seems amiss at any point in the mortgage process, you can always walk away.
What is a bank statement loan?
Roughly 44 million Americans are self-employed, including freelancers and contract workers, according to a 2020 Gallup report.
So it’s no surprise that there special mortgage programs to help self-employed people buy a home or refinance their current home.
Bank statement loans are a popular option. These don’t require W2s or previous years’ tax returns.
Instead, underwriters verify your monthly income by looking at deposits on your recent bank statements.
You’ll typically need to provide the past 12-24 months’ bank statements, along with other supporting documentation.
Pros and cons of bank statement loans
Many business owners, contract workers, and others in the gig economy minimize their tax liabilities by maximizing their deductibles for business expenses.
These write-offs can make their income look much smaller than it really is.
Some self-employed mortgage borrowers use bank statement loans to get around this obstacle, by counting most or all their income while ignoring expenses.
Bank statement loans come in several flavors. We found self-employed mortgage lenders offering:
- 30-year fixed-rate mortgages
- 5/1 adjustable-rate mortgages (ARMs)
- 7/1 and 10/1 ARMs
- Jumbo loans with loan limits in the millions
As an added benefit, many bank statement loans require no mortgage insurance.
Since non-QM loans can’t be sold to Fannie Mae or Freddie Mac, lenders aren’t required to charge the (borrower-paid) private mortgage insurance that so many home buyers try to avoid.
Disadvantages of bank statement loans
Non-QM loans aren’t regulated like other mortgage programs. That means each lender sets its own criteria or “underwriting standards” for approving these loans.
And, interest rates are typically higher on these mortgages. So you should expect to have to shop around even more than usual for a good deal.
Don’t be put off if you’re turned down by one or more lenders. Keep looking, and you may well find one that’s eager to help you.
Some experts recommend that you find at least five self-employed mortgage lenders for your shortlist and then compare their offers side by side.
Do you need a bank statement mortgage?
As a self-employed borrower, you’re not required to use a bank statement mortgage.
You have the option to apply for mainstream loan programs just like everyone else, including conventional, FHA, VA, and USDA loans.
These major loan programs can be easier to qualify for and typically offer lower rates than non-QM mortgages.
However, you’ll have to verify income using your tax returns rather than your bank statements. This could reduce your “qualifying” income since you have to use your after-expenses income for the year.
Many self-employed people write off most of their income in expenses. A great strategy for paying less taxes, but not for getting a mortgage.
- $100,000 gross income
- $60,000 in claimed expenses on tax returns
- $40,000 taxable income and the only portion usable for mortgage qualifying
Write-offs can put a huge dent in your income as a lender sees it. But if you can qualify using the lower amount, you’ll get a better deal on your mortgage through a traditional program.
Think about your home buying or refinancing goals: Do you want the lowest rate? The biggest loan amount? The cheapest monthly payment?
Knowing your goals will help you compare options and find the best loan program for you.
Check your mortgage loan options (Feb 1st, 2021)
Bank statement mortgage requirements
Because these are non-qualified mortgages, every lender gets to make up its own rules. And sometimes a lender will tailor the rules it applies to the applicant.
For example, a lender may normally ask for only 12 months of bank statements. But, if you’re borderline in some way (perhaps you have a low credit score), it may ask you for statements going back 24 months. Others want two years of bank statements for all applications.
The following common requirements are just a rough guide of what you might need to qualify as a self-employed mortgage borrower:
- Bank statements — Typically for the past 12 or 24 months
- A worthwhile down payment — Often 10% of the purchase price or more
- Cash reserves — Enough savings or quickly accessible assets to cover several months of mortgage payments. Expect to have to document these
- A decent credit score and clean credit report — Some lenders will approve FICO scores as low as 580. But you’ll likely need a score of 620 or higher. And remember, the higher your credit score is, the lower your rate will likely be
- A debt-to-income ratio (DTI) below 55% — Many non-QM mortgage lenders have more lenient DTI requirements than those doing conforming loans
- A profit & loss statement (P&L) — Typically for your business’s last 12 months of trading, prepared by your licensed tax professional. Most often required if you mix your personal and professional finances
- A business license — Only if one is required in your line of work
You will also need a letter from your accountant or licensed tax professional that confirms that you file your taxes in an appropriate self-employed category. He or she may also have to confirm that your expense deductibles are in order.
Don’t be put off if you’re worried you’ll fall short on one or two of these. Some lenders are more flexible than others.
Bank statement loan rates
Bank statement loan rates are higher than traditional mortgage rates, since non-QM loans are considered a bigger risk.
For entrepreneurs and many in the gig economy (the ones most likely to choose bank statement loans), financial life can be precarious.
So lenders have to expect more loans to go bad. And the only way they can cover that additional risk is to charge higher interest rates.
Every lender assesses risk in its own way. So it’s hard to come up with a helpful average for how much higher bank statement rates really are.
But when we sampled a few bank statement loans on the day this was written, we found a number quoting rates of around 4.5% for a 30-year fixed-rate mortgage (FRM).
Compare that with an average rate of 2.8% for mainstream 30-year FRMs on that same day. Bank statement mortgage rates were nearly 2% higher.
That’s not to say you can’t find a good deal. But it should underscore the importance of shopping around for your best offer.
You might see a wide variety in the rates you’re offered, and you want to be sure you’re getting the most affordable loan you can.
How to choose the best mortgage lender for you
Mortgage pros and financial advisers are forever urging mortgage seekers to comparison shop for their loans. And they’re right.
Borrowers can easily save thousands or tens-of-thousands of dollars over the lifetimes of their loans, simply by investing a few hours in getting and comparing quotes from several lenders.
These quotes come in the form of “Loan Estimates.” And they’re all in the same format. So they’re very easy to compare side by side.
You’re obviously looking for a low mortgage rate. But don’t forget to also compare the following information, which will be on every quote:
- Annual percentage rate (APR) — This is a better guide to the actual cost of a loan than a raw mortgage rate. It includes the total loan cost spread over the life of your mortgage
- Estimated closing costs — How much you’ll pay in loan costs
- Estimated cash to close — The amount you’ll need on closing day: closing costs plus down payment and any other liabilities
- The total amount you’ll have paid after five years — A good way to compare the intial cost of two different loans
- The amount by which you’ll have reduced your debt (the “principal” you’ll have paid off) after five years — A key indicator of value for money
This is vital stuff. And it’s your opportunity to select the loan that suits you best.
Remember, you’re likely to see a wider range of loan types, loan terms, and interest rates from bank statement mortgage lenders. So it’s really in your own interest to spend some time shopping around.
Verify your new rate (Feb 1st, 2021)