A Bank Statement loan is a type of loan that is specifically available to borrowers who are self employed. Traditional conventional mortgage loans require business owners to supply their federal tax returns (typically at least 2 years) to derive their qualifying income. This puts many business owners at a disadvantage, as the tax benefits they receive on taxes hurts their ability to qualify for loan, even though their income can support the loan payment. Bank statement loans offer more flexibility and fewer restrictions for borrowers who own a business, especially those borrowers with good credit and large down payment.
Bank Statement loans offer several advantages for self employed borrowers. First, it allows you to qualify without supplying your tax returns. Instead, your qualifying income is determined using your previous 12 or 24 months of business (or personal) bank statements. Typically, 50% of your average monthly deposits can be used for qualifying, although lenders will allow up to 80% of deposits with an accompanied letter from your CPA.
It is possible to obtain a Bank Statement mortgage loan with a down payment as low as 10% and often without the need for private mortgage insurance (PMI). Keep in mind that a lower down payment may result in additional costs and an otherwise higher interest rate. Often a down payment of 20% + will result in much more favorable interest rates and costs.
To qualify for a Bank Statement loan, you generally need a good credit score (usually above 640), a 2 year business history (could be, and a debt-to-income ratio below 50%. Other factors, such as your income, assets, and the property's appraisal value, will also be considered. Specific requirements may vary, so it's essential to consult with a mortgage professional to determine your eligibility.
- Higher Loan Limits: Bank Statement loans generally offer higher loan limits, often going up to $3 million.
- No Private Mortgage Insurance: Unlike conventional loans with less than 20% down, Bank Statement loans often do not require private mortgage insurance, which can keep your monthly payment lower.
- Flexible Qualifying Options: With a Conventional loan, there is a single formula used to calculate qualifying income from your federal tax returns. Bank statement loans provide flexibility in qualifying by using your deposits and your business' unique expense ratio. Many business owners who are turned down for a conventional loan will qualify using a bank statement loan.
It's important to note that both loan types have their own advantages and considerations, and the right choice depends on your specific financial situation and goals. Consulting with a mortgage professional can help you evaluate the options and determine the best fit for your needs.