Understanding a Bank Statement Loan
For entrepreneurs and self-employed individuals, securing a mortgage can often be a challenge. Traditional home loans typically require W-2 tax returns and other documentation that may not accurately reflect the income of self-employed borrowers. This is where Supreme Lending’s bank statement loans come in. Designed for those who run their own businesses, bank statement loans offer an alternative option for self-employed homebuyers without the need for conventional income and tax documentation. Here’s everything you need to know about bank statement mortgages.
What Is a Bank Statement Loan?
A bank statement loan, commonly known as a self-employed mortgage, is a type of home loan designed for those who may have non-traditional sources of income. Simply put, instead of relying on W-2 forms and tax returns, lenders use the borrower’s bank statements to verify their income to approve the loan. This allows self-employed individuals to qualify for a mortgage based on their cash flow rather than their taxable income, which may be reduced by business expenses and tax deductions.
How Do Bank Statement Mortgages Work?
Income Verification
For these types of loans, lenders typically review the past 12 to 24 months of your personal or business bank statements to determine your average monthly income. This provides an accurate picture of your financial health and ability to repay the loan and make monthly mortgage payments.
Down Payment Requirements
The down payment requirements for bank statement loans can vary depending on the lender, but it can generally range from 10% to 20%. A larger down payment amount can sometimes secure more favorable terms and interest rates.
Credit Score and Other Requirements
While these loans are designed to be a more flexible homebuying option, mortgage professionals will still review your credit score, assets, and other financial factors to assess the potential lending risk. A higher credit score may increase your chances of approval for the loan.
Common FAQs and Considerations
Who Can Benefit from a Bank Statement Mortgage?
As mentioned above, these loans are ideal for self-employed borrowers, including small business owners, corporation owners, freelancers, and gig economy workers whose income may be substantial, but not consistently documented like W-2 employees. It’s a great option if you have strong cash flow but your tax returns don’t reflect your true income due to tax write-offs and deductions.
What Types of Properties Can Qualify?
These loans can be used to purchase various types of properties, including single-family homes, condos, townhouses, and in some cases multi-family properties. There are also options for second homes and investment properties depending on the loan type. Each lender has specific property requirements and guidelines, so it’s important to work with a knowledgeable loan officer to help guide you through the process.
What Are Interest Rates?
Interest rates for bank statement loans may be higher than those for Conventional loans due to the potential increased risk to lenders. However, if a borrower has a strong financial profile, it may be possible to lock in a more competitive rate. Additionally, rates are typically lower for a 24-month bank statement loan versus 12 months.
How Is Income Calculated?
For bank statement mortgages, lenders will typically sum up your total deposits over the selected period of time (12 to 24 months) and divide by the number of months to calculate your average monthly income. Business-related expenses and unusual deposits may be excluded to ensure a more accurate income assessment.
What If My Spouse Is a W-2 Employee?
Depending on the loan program and circumstances, lenders may consider a spouse’s income as well when calculating their joint eligibility for a bank statement loan. For example, a business owner’s average monthly income and a spouse’s W2s, paystubs, and employment verification could both be used to determine their combined income.
Benefits of Bank Statement Lending
Owning your own business is part of the American Dream. However, business owners may not qualify for a traditional mortgage to buy their American Dream Home. Bank statement loans offer that freedom. They give self-employed borrowers flexibility to use their true income without being tied down by tax deductions or business expenses. It also opens the door to homeownership for more people in the community—whether it’s their first home or tenth.
If you’re self-employed and ready to explore your mortgage options, contact Supreme Lending today. We’re here to help you navigate the process and find the best loan option to fit your unique needs.
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