With a changing work environment, bank statement loans are becoming more important than ever before. People are adjusting how they work, and these changes have made the need for flexible loan approval more common.
Using bank statements instead of paystubs, these loans create opportunities for borrowers with unique needs and diverse income sources.
Bank Statement Loans: More Important Than Ever
What is a Bank Statement Loan?
In a traditional mortgage, the lender will use various documents to verify your income. These documents may include W-2 forms, tax returns, and a variety of other documents that demonstrate your ability to repay the loan. Of course, there are other factors involved as well, including your credit score and debt load. Income, however, is an important factor no matter how high your FICO score or how low your debt payments.
But some people, for a variety of reasons (which we will address below), do not have the typical income documents used by most borrowers. Many people, such as the self-employed, do not have W-2 forms from an employer. For others, such as investors, tax returns do not accurately reflect their entire earnings.
Bank statement loans provide an alternative. These loans, as the name suggests, use bank-account information to verify someone’s income.
It’s really that simple. Instead of documents from an employer, a lender looks directly at someone’s bank statements to get the information they need.
In a way, bank statements can be even more reliable than other forms of income verification. Lenders can consult the statements not only for income, but for total savings, spending habits, debts, and other important information. They are, in a very real sense, a more reliable option.
Who Uses Bank Statement Loans?
These loans can be used by practically anyone (assuming they qualify), but certain people will find them more useful. First of all, anyone who has an inconsistent income will likely find these loans to be helpful. Commission-based sales representatives, for example, will be able to use these loans. Many lawyers and clinic-based doctors also have inconsistent incomes, so these loans could be the best option.
Self-employed people, including solo freelancers and business owners will likely find a benefit from bank statement loans. These professionals do not have documents from employers, so even if their income is relatively consistent, they may have trouble landing a quality loan.
A real estate investor is another example of someone who can use this loan option. Especially if you are involved in “fix-and-flip” investing, where profits come in small numbers of large payments, you’ll likely want to learn about bank statement loans.
These loans are not just an option for homebuyers; they can also be used for refinancing. Existing homeowners who have quit the traditional workforce and moved into investing, entrepreneurship, or freelancing can use these loans to refinance their homes.
What is Required to Use a Bank Statement Loan?
To use a bank statement loan, you need to provide…bank statements! (How’s that for an obvious statement?)
A single statement, however, is usually not enough. These loans generally require one to two years of information, as well as documents verifying that you have been in the profession for two years or more. For example, if you have been a business owner for five years, you’ll need to verify this fact. However, if you have only been self-employed for a single year, you’ll likely need to wait another two years.
These loans also require a decent credit score, although stellar credit may not be required. The exact score will depend on a variety of factors, including your debt-to-income ratio, total income, and downpayment.
When looking over your bank statements, the lender or loan agent will verify your total savings. This is an important number, as the lender will want to see that you have enough savings to cover payments if you have a temporary drop in income. There usually needs to be enough cash to cover roughly a year of payments, although two year’s of cash reserves could be required.
While the loans are based on your bank account information, you may have to verify any assets that are supporting the loan, such as 401(k) accounts and mutual fund accounts.
If you operate a business, your lender may request a document from your tax preparer or accountant as well. This document will be used to validate your business expenses and confirm that you have filed tax returns as an independent contractor, not an employee.
COVID-19 and the Importance of Bank Statement Loans
Bank statement loans have become increasingly important since the COVID-19 pandemic struck the United States. Since the spring of 2020, people have drastically changed how and where they work. Not only have people shifted to working from home, the nature of their work has changed, and some people are seeing that self-employment through owning a business or freelancing from home is a safer and more reliable way to earn an income.
People are also seeing the benefit of investing in properties and earning a diverse income. No longer are people solely reliant on their job for their income, but have instead invested in property, taken work-from-home gigs, and taken on 2nd jobs to create better stability, reliability, and financial flexibility.
Even if you have a side hustle, but still maintain a full-time job, bank statement loans could be the ideal choice. They provide borrowing versatility, and could help you find a loan that works best for your specific needs.
Dedicated Support from an Expert Team
If you are a sales rep, self-employed professional, or an investor, contact our staff to learn more about the advantages of bank statement loans. With a high level of experience in the mortgage industry, we can help you choose the right loan for your specific needs.
Whether you need a bank statement loan for an investment or a conventional loan for your first home purchase, we are here to help all along the way!