If you are among the millions of Americans that are self-employed, you could possibly look “poor” on paper according to your underwriter. If you are like most every other taxpayer and take every possible write-off you can take in order to minimize your tax liability, your income might look pretty meager when it comes time to qualify for a mortgage when you try to align with the new Qualified Mortgage Guidelines. The good news is that an alternative documentation loan, such as the Bank Statement Loan might be the perfect choice and more and more lenders are offering them today.

Why you Look Poor

Underwriters are trained to look at the bottom line on your tax returns – this means not your gross income, but your adjusted income after all of the credits and deductions. Unless you want to pay higher taxes, you are stuck with the adjusted income figure when you qualify for a mortgage. Some lenders do allow a few deductions and credits to be added back into the adjusted gross income, but typically not enough to qualify for conventional financing. Because the guidelines are so strict with QM, you need to keep your debt-income ratio as low as possible – typically under 43 percent. In reality, your DTI might be at or below 43 percent, but if your tax returns show lower income, then lenders have to calculate your DTI as it is, making you ineligible for a conventional loan.

How Bank Statement Loans Help

In order to boost your DTI back to where it really belongs, search for bank statement loans, which enable you to forgo the need for tax returns and W-2s and instead allow you to use your bank statements as proof of your income. This is not a stated income loan because you are verifying you income, just in a non-traditional way. Lenders will ask for either 12 or 24 months of your bank statements, depending on the length of time you were self-employed along with their own guidelines. They will look for consistent deposits that signify income from your business, which means weekly, biweekly, or even monthly deposits of around the same amount of money or at least originating from your business. They will take that income and average it out over the 12 or 24-month period to calculate your income.

In order to calculate your DTI, the lender than uses the income derived from your bank statements in conjunction with the debts reporting on your credit report. Because alternative document loans are not Qualified Mortgages, some lenders allow a slightly higher debt ratio if you have other compensating factors to minimize the risk of your loan. This means things like:

• Plenty of reserves on hand in the event that your business was to stop producing income. Typically lenders want 12 months of reserves in cases like this one.
• High credit scores that show financial responsibility. Excellent scores are those over 720.
• Low amount of outstanding installment and revolving debt to minimize the number of payments you are responsible for each month.

Another compensating factor would be the length of time you are self-employed. For example, a person that just started their new business 6 months ago is considered much riskier than a borrower that has owned their business for several years. If you are a fairly new business owner, a compensating factor that can help back up your case is if you were previously in the same industry and just branched out to start your own business. Experience equals stability in the eyes of the lender and can help you get the bank statement loan you need to purchase a home.

There are many banks today that are offering bank statement loans. While you may not find them at the large lenders, most mid to small-size lenders are turning to this lucrative financing option because there are so many potential borrowers being overlooked for their ability to have a mortgage. If you are self-employed and your tax returns make you look like you make less than you actually make on a monthly and/or yearly basis, consider the Bank Statement Loan for your mortgage needs.