This article will describe the most common bank statement loan program mistakes and provide useful tips so you can avoid typical problems.
Bank statement home loans can be used by a variety of mortgage borrowers, especially self-employed professionals, to increase their chances of final approval. While a good loan officer can walk you through the process, here are five of the most common mistakes that bank-statement borrowers make when applying for these mortgages.
Top 5 Bank Statement Loan Program Mistakes
Here are five mistakes you should avoid when applying for a bank statement loan.
1. Working with the Wrong Loan Officer
Overall, this is the biggest mistake made by homebuyers who want to use a bank statement loan. The loans, while incredibly useful, are uncommon and unique. They have a specific set of conditions and requirements, and not all loan officers are experienced with these mortgages.
An experienced loan officer, one who fully understands the process of qualifying for a bank statement loan, can not only increase your chances of approval, but also increase your chances of getting the best possible terms. Nothing is guaranteed, but an experienced loan officer can help you get a better interest rate or terms that fit your unique needs.
How Can You Avoid this Mistake?
To avoid this common mistake, you need to ask questions. How much experience does the loan officer have with bank statement loans? How many bank statement loans have they approved? What is their process for qualifying a borrower for one of these loans? These questions, and more, will help you understand the loan officer’s experience level and help determine if they are the right person for your mortgage.
2. Not Understanding and Improving “Expense Factor”
Bank statement loans are all created differently, using different requirements that are best for each lending institution and each loan officer. Bank statement loans, to put it bluntly, are not created equal. This includes issues like the “expense factor.”
Each investor has a specific approach to the calculation of income, and many use an expense factor that is somewhere between 50% and 25%. However, some investors are willing to accept a letter from a CPA that would allow the expense factor to be as low as zero when appropriate.
An expense factor isn’t needed on a personal bank statement loan unless the borrower does not have a separate business account.
If the borrower only maintains one account for both personal and business purposes, the account will be considered commingled, and an expense factor will be applied.
Essentially, the lower your expense factor, the better your chances of getting a large bank statement loan approved.
How Can You Avoid this Mistake?
To avoid the mistake of not understanding expense factor, you should do everything possible to research the issue. Start by discussing expense factor requirements with your lender. Have them explain, in clear detail, what it is, why it matters, and how you can improve your chances of final approval. Again, this is why working with an experienced loan officer is crucial, as they can explain expense factors and give examples of how to improve your numbers.
3. Not Saving and Documenting Reserve Requirements
Virtually all bank statement loans, regardless of the lending organization or the lending officer, will require reserve requirements of some kind. The reserve requirement is simply an amount of cash or assets that you need to have in savings to qualify.
The total is generally calculated as a certain number of monthly payments. For example, a bank statement loan may have a reserve requirement of 12 months. This means you need to have the equivalent of 12 payments in savings; if the payment is, say, $2,000, you’ll need to have $24,000 in savings to qualify. This money is kept in savings and not used towards the downpayment or closing fees. You just need to prove that you have it.
Some programs require as little as six months of reserve requirements, while others require a year and a half (18 months) of reserves. (There are also cash-out refinance programs that allow the proceeds to meet these reserve requirements.)
How Can You Avoid this Mistake?
This step requires long-term planning. If you expect to use a bank statement loan in the future, you should start saving for reserve requirements and pile up as much as possible. Also, talk with a lender to see what types of assets are allowed. Depending on the lender, you may need to sell some assets and convert them into cash to qualify for the loan.
4. Not Researching “Non-Sufficient Funds”
“Non-sufficient funds” can significantly disrupt your chances of reaching mortgage approval on a bank statement loan. This is something that needs to be addressed from the very beginning and should be fixed upfront in the loan process.
If you know you have non-sufficient funds status in your bank statements, and your loan officer does not mention it at the start of the process, it’s a strong indication that you may be working with a loan officer who is inexperienced with a bank statement program.
How Can You Avoid this Mistake?
To avoid this critical mistake, we’ll first go back to our original topic: working with an experienced lender. It might sound repetitive at this point, but it’s the truth: if you want to have a successful approval process, if you want to avoid problems with non-sufficient funds in your bank account, you should work with an experienced loan officer.
Of course, ensuring your statements have sufficient funds, through frugal spending and wise financial management, will also help in your process.
5. Not Excluding Large Deposits from your Income Calculations
Bank statement loans are designed to use deposits related to your regular income activity. Paychecks and payments from your business are the foundation for these loans. Large, out-of-the-ordinary deposits, such as the sale of a car or house, or large cash gifts, are not considered income. They will, therefore, be excluded from your income calculation.
The mistake here comes when people assume they can use any money as part of their income. For example, they sell a car for $30,000 and assume the cash can be considered part of their income simply because it’s in the bank statement. This is false, and making this mistake could lead to disappointment when you discover it can’t be used.
How Can You Avoid this Mistake?
To avoid this mistake, only consider your regular income before meeting with a lender. Use your regular business-based income and you won’t be disappointed when you meet with a lending officer.
Avoid the Common Bank Statement Loan Program Mistakes
You deserve a high-quality loan for your next purchase. Contact our staff and we’ll help secure the bank statement loan you need so you can buy a wonderful new property!
