If you’re a regular follower of financial news and the real estate market in particular, you’ve probably noticed that it’s taken almost a decade for home values to finally return to their pre-Great Recession highs of 2007. It’s also been a slow comeback for non-traditional, or alternative documentation home loan programs. Many Self-employed and 1099 independent contractor borrowers have had difficulty securing home financing during this time but will be pleased to hear however that an updated version of the “stated income” home loan of the past is starting to make its long-awaited return as well.
Stated Income Loans and the Ability to Repay
Home values continue to improve and the economy is further stabilizing while the need for the US Central Bank to rely on radical measures like Quantitative Easing diminishes. But you may be wondering why it’s taken so long for mortgage underwriting requirements to evolve at the same pace as rising home values over the last ten years.
Here’s one big reason: The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 makes it a requirement that a lender be able to provide documented evidence of a borrower’s ability to repay the loan used for the purchase or refinance of an owner-occupied primary residence, or else the loan may be considered “non-QM”.
Lenders who break this rule are left taking on much greater risk and are provided with fewer options for recourse in the event of borrower default. Read more about non-QM Loans: https://sandiegopurchaseloans.com/non-qm-home-loans-help-turned-down-home-loans/
Ability to repay is naturally easier to demonstrate when it comes to a traditional W-2 borrower. Providing personal tax returns has long been the established method for verifying income because it removes almost all the guesswork. This method can however can severely limit home loan options for borrowers who are self-employed.
The Self-Employed Borrower
Fortunately, submitting income tax returns to a lender is not the only way a borrower can demonstrate that they can repay a home loan. In lieu of tax returns, a borrower’s bank statements can also be used to evidence cash flow and income. By looking at the amounts going in as well as going out on a monthly basis, as well as cash-on-hand, also known as a borrower’s “reserves”, a lender can make a fairly accurate assessment for loan qualification purposes.
Stated Income Loans
The term “Stated Income” loan is somewhat of a misnomer. You may have also heard these types of loans also referred to as “Alternative”, “Non-QM”, or “EZ doc” but the only information that’s truly stated on the loan application is the borrower’s monthly gross income. The approval process is otherwise the same as a traditional “Full Documentation” loan and most all items will still need to be officially verified by the lender.
What are the Qualifications for a Bank Statement Loan?
Each lender has their own qualifications that will be specific to their bank statement program. In addition to the subject property’s occupancy (owner-occupied, second home, or investment), here’s a list of commonly shared guidelines:
Your FICO should be at least 720, and preferably above 740. FICO refers to your credit score reported by the three credit bureaus Equifax, TransUnion and Experian. Almost every lender will use your FICO score as a major factor in their decision, so it’s important to review your credit report often for accuracy and take steps to correct any reporting errors in your payment history right away. Learn five ways to raise your credit score now: https://sandiegopurchaseloans.com/5-ways-raise-credit-score/
Two years of self-employment in your current business is still verified. A copy of a business or state license, corporate paperwork, or a letter from your CPA confirming your self-employed status will typically be requested.
At least 30% down payment (or existing equity if you’re refinancing) is required and is verified. Gift funds are not permitted but borrowed funds secured by real estate owned by the borrower may be used towards your down payment.
12 months of mortgage payments in the bank is verified in the event there is a break in your income. All funds for closing and reserves must be seasoned in accounts held by the borrower for a minimum of 60 days. The exception to the seasoning rule are proceeds from the sale of real estate owned by the borrower. Please note that funds from a concurrent sale, however, may not be used to meet minimum reserve requirements.
Debt-to Income Ratio
45% Debt-to-Income Ratio (DTI), although ratios as high to 55% may qualify if additional reserves are provided.
How is my Monthly Gross Income Calculated from my Personal Bank Statements?
Calculating your income from examining your bank statements is fairly straightforward.
Scenario A: Your business has consistent cash flow and makes regular and even deposits:
A self-employed borrower deposits $14,000 into a personal bank account on a monthly basis over the course of the year. This borrower can therefore apply $14,000 to qualify for a home loan.
Scenario B: Your business has inconsistent and unpredictable cash flow and makes periodic and uneven deposits:
A self-employed borrower, especially one that owns a seasonal business, may make one large deposit of $250,000 or maybe make uneven deposits that total $250,000. The total amount of your deposits into your personal account are still averaged over 12 months, which in this case means $20,833 per month can be used towards qualifying for a home loan.
Can you use business bank statements?
Bank statements from business accounts can be used for reserves, down payment requirements, or for closing, as long as you are the majority owner of the business. The use of business bank statements is also based on the percentage of ownership. Some lenders may also allow a partial amount of business bank deposits to be used towards your monthly income.
How about stocks, bonds, and mutual funds?
Publicly listed stocks, bonds, and mutual funds can also be considered as assets to qualify for a home loan, but whereas bank deposits are applied 100% and dollar for dollar, the following adjustments apply:
70% – Stocks, bonds, mutual funds
70% – IRA if borrower is older than 59.5
60% – IRA if borrower is younger than 59.5
Qualify for a Home Loan with No Personal Tax Returns
Bank statement programs for the self-employed borrower can remove the requirement to provide tax returns and are now becoming more readily available in the marketplace again as lenders are beginning to recognize that small business owners and independent contractors represent an important niche and needs to be included in their investment portfolio.
“This is the second time that I have worked with Chad (home purchase & refinance). He has become my subject matter expert and someone I depend on for all finance needs related to our home and real estate investments. My favorite things about Chad are his depth of knowledge, responsiveness, honesty and the great service he provides. I have referred countless friends and family of mine to work with him for no other reason than I know that he will treat them well and equip them for the best possible outcome. Chad will add tremendous value to any real estate transaction that you have and I am grateful to have him as a resource.”
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