February 15, 2022

Bank Statement Loan | Self-Employed Solutions

bank statement loan; mortgages for self-employed borrowers

Let’s face it. Self-employed borrowers tend to have it harder than others. The underwriting requirements are a little more demanding than most. Tax returns, profit & loss statements, and uncompromising income calculations… Until now. The Bank Statement Loan program is a solution for self-employed borrowers who may not otherwise qualify based on their tax returns. 

Why is a Bank Statement Loan Needed? 

Traditionally, qualifying income for self-employed borrowers is calculated using a two-year average of net income listed on their federal tax returns. The problem? Write-offs. 

Let’s say your income is primarily gig-based, contracted work. In industries like landscaping, photography/videography, and entertainment, there are a lot of write-offs come tax season; such as travel, meals, equipment, etc. This leaves your reported net income much lower than actuality and, subsequently, your debt-to-income ratio much higher.  

The Debt-to-Income Ratio

Mortgage requirements are sometimes compared to a 3-legged stool. 

  1. Credit – A credit score of 680 or higher is ideal for qualifying for a loan. But if your score is lower, or you have a few blemishes, talk to a mortgage banker about the many ways you can still qualify.   
  2. Assets – You will need to provide proof of funds for the down payment, closing costs, and in the case of some loan programs, 2-6 months of mortgage payments. 
  3. Income & Debt – Monthly debts include things like car payments, revolving credit card debt, and student loans. (Basically, things that show up on your credit report).  Monthly debts are divided by monthly income to calculate your debt-to-income ratio. A ratio of 43% or lower is the goal. 

So, back to the reason for a Bank Statement Loan… If your reported income is much lower than the actual because of write-offs, then your DTI is not an accurate reflection of what you can afford. By providing monthly bank statements as proof of income, an underwriter will be able to see that you make enough money to make your car payment, student loans, etc., and afford the mortgage. 

How Does it Work? 

Rather than asking for tax returns, Bank Statement Loans use 12-24 months’ worth of statements to calculate income. Best of all, the program includes low down payment options, like 10% down and no mortgage insurance, and loan limits up to $1 million

In short, a bank statement loan is the answer for countless independent contractors, gig-workers, and entrepreneurs looking to reach the dream of homeownership.

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