If you don’t have traditional income or you own a business and write off a lot of expenses, you may think you’ll never qualify for a mortgage. Luckily, the bank statement mortgage program still exists, despite its bad reputation following the housing crisis.
Not all banks offer a bank statement program, but there are plenty that still do. Keep reading to learn how you can qualify for this type of loan to help you buy a home.
How it Works
Bank statement mortgage programs typically require you to provide 12 to 24 months of bank statements. This is the only way that lenders verify your income, so they need to get a good average of your income. If they just asked for two months of bank statements, you could have just had two very good months or two very bad months. This means the lender would either see very inflated income or very deflated income, neither of which are good for qualifying purposes.
After you provide 12 to 24 months of bank statements, the lender will average the amount of income on those statements. They will look for consistent deposits whether of a similar amount or on consistent dates to confirm your income. Of course, not everyone receives a consistent amount or gets paid on regular dates, so it could be a little harder for lenders to determine your income.
The average monthly income that the lender calculates based on your bank statements is what they will use to qualify you for the loan. Once you know your average income, you can then see if you’ll qualify based on the lender’s requirements.
What are the Lender Requirements for Bank Statement Loans?
Because bank statement loans aren’t part of the Qualified Mortgage Program, lenders are free to come up with their own requirements. This means you’ll likely see different requirements from each lender, but in general, you can expect:
- Decent credit scores of 650 or higher – You may find some lenders that allow credit scores as low as 500 and others that want credit scores as high as 700. The higher your credit score is, though, the better your chances of qualifying for the mortgage with the interest rate and term that you want.
- Average debt ratios – Again, debt ratios could vary greatly by lender, but overall, you should have a total DTI of less than 50%. Of course, if you have a debt ratio lower than that, you increase your chances of approval and each lender will have their own requirements. If you come across a lender with strict DTI requirements that you can’t meet, you can always look elsewhere.
- Average Loan-to-Value ratios – You’ll find lenders that allow you to borrow as much as 90% of the home’s value and others that don’t want you to borrow more than 70% of the home’s value. It often comes down to your credit score. If you have a high credit score, you may qualify for a higher LTV. If you have a low credit score, lenders may feel better with a higher down payment to decrease the risk of default.
- Reserves – You may need as much as six months of reserves when you have a bank statement loan. The reserves help the lender know that you’ll pay your mortgage even if your income decreases or stops suddenly. One month of reserves is equal to your total housing payment, which includes principal, interest, real estate taxes, homeowner’s insurance, and mortgage insurance (if any).
Understanding the Interest Rate and Terms on Bank Statement Loans
Bank statement loans put the lender at risk of default. The lender relies on your income, without any verification from a third-party, such as your employer or a CPA that does the accounting for your business.
Because of this risk, lenders often quote you higher interest rates. While they aren’t going to be so high that you can’t afford the rates, they will be slightly elevated compared to any interest rate on a fully-verified loan.
As far as the terms go, lenders typically offer a variety of loans including fixed and adjustable rate loans. They often have terms that go as long as 30 years, but they also offer shorter terms as that reduces the risk of default.
How you Can Qualify
So how can you qualify for a bank statement mortgage? The best thing you can do is prepare yourself. Take the time to increase your credit score, have money saved for a down payment and reserves, and decrease your debts. This may take time, but it will increase your chances of loan approval.
The following steps may help:
- Pull your free credit report from annualcreditreport.com. Go over the report and see what negative information reports. Do what you can to fix that situation so that you can increase your credit score before you apply for a loan.
- Pay your debts down. Look closely at your credit report to see what debts you have outstanding. Then do what you can to pay those debts down or off entirely. This way you can keep your debt ratio low and increase your chances of approval.
- Save money. Chances are that you’ll need some money for a down payment as well as money in reserves. The lower your loan-to-value ratio and your compensating factor of having reserves are, the better your chances of getting approved for the loan become.
Yes, you can qualify for a mortgage with bank statements alone, but it’s a process. You’ll have to find a lender that offers the program and then see if you meet their requirements. Bank statement loans do pose a higher risk to lenders, so they tend to be choosy about who they give the loans to, but the programs are out there for those that qualify.