For many people, obtaining a mortgage is a straightforward process – provide standard income verification documentation like tax returns or pay stubs, and you’re good to go. But what if you’re self-employed or earn income from non-traditional sources? Suddenly, the traditional path to obtaining a mortgage becomes a lot more complicated. That’s where bank statement loans come in.
In this post, we’ll dive into what bank statement loans are, how they work, and why they might be the perfect option for you if you don’t fit the traditional mold when it comes to income verification.
How Bank Statement Loans Work
Bank statement loans are a type of mortgage or loan program that allows borrowers to qualify based on their bank statements, rather than traditional income documentation. The idea behind this program is simple: for people who don’t earn income in a predictable or traditional way, like self-employed individuals or those who rely on rental income, it can be challenging to provide the income verification documentation that’s typically required for a traditional mortgage loan.
Bank statement loans aim to bridge that gap by allowing borrowers to provide bank statements that show a history of consistent cash flow.
Criteria for Bank Statement Loans
While the criteria for bank statement loans will vary by lender, there are a few general guidelines to be aware of. Typically, these loans are available to borrowers who have been self-employed for at least two years, have a credit score of at least 580, and are able to provide at least 12 months of bank statements, although some lenders may require 24 months or more.
Additionally, borrowers usually need to have a debt-to-income ratio of 43% or less and be able to provide a significant down payment.
Benefits of Bank Statement Loans
One of the most significant benefits of bank statement loans is that they offer flexibility and a pathway to homeownership for people who might not be able to obtain a traditional mortgage. By allowing borrowers to qualify based on consistent bank deposits, these loans open the door for those who earn money in less traditional ways.
Additionally, bank statement loans may have more lenient credit score requirements than traditional mortgage loans, making them a viable option for people with less-than-stellar credit. Finally, bank statement loans may offer quicker approval times and a streamlined application process, since there is often less documentation required than with a traditional mortgage loan.
Potential Drawbacks of Bank Statement Loans
While bank statement loans can be an excellent option for many borrowers, it’s essential to be aware of some of the potential drawbacks. Firstly, because they cater to borrowers who don’t fit traditional income molds, bank statement loans can come with higher interest rates and fees than traditional loans.
Additionally, because they rely on bank statements as proof of income, borrowers need to have a history of consistent deposits. If you’ve had a period of low income or irregular deposits in the past 12-24 months, a bank statement loan might not be the right fit for you.
Obtaining a mortgage is a significant milestone and a crucial part of the home buying process for many people. However, for those who don’t fit into the traditional income verification mold – like self-employed individuals or those with rental income – it’s essential to know that options like bank statement loans exist.
By allowing borrowers to qualify based on bank statements that show a history of consistent cash flow, these loans provide a pathway to homeownership for those who wouldn’t be able to obtain a traditional mortgage.
If you’re self-employed, earn income from non-traditional sources, or have struggled to obtain a traditional mortgage, it might be worth exploring bank statement loans as an alternative.
Blue Ocean Lending, LLC. is a wholesale lending firm with offices in Florida, Texas, West Virginia and Pennsylvania. Wholesale lending is lending through mortgage brokers. This allows quick access a wide variety of quality loan options, providing a solution for the client’s needs.