The Bank Statement Loan is Here
For the past decade or so, self-employed borrowers have been in search of suitable mortgage programs. Many well-qualified business owners found themselves shut out of the hot real estate market over the past few years. Often it is difficult and time-consuming for self-employed borrowers to obtain standard mortgages. The reason for the difficulty is due to all the onerous documentation.
Self-employed borrowers often find themselves buried in paperwork. Between personal returns, business returns, and signed letters from CPA it can feel overwhelming. In addition to all the mountains of paperwork, business owners find that every line of their documentation is scrutinied. Due to expenses and write-offs, many self-employed borrowers’ tax returns do not reflect their accurate income based on traditional underwriting guidelines.
How Does the Bank Statement Program Work
For self-employed borrowers who prefer to not provide tax returns and other income documentation – the Bank Statement Mortgage is the perfect solution. The benefit of the Bank Statement Mortgage is that the only income documentation required is 12 or 24 months of bank statements. With those bank statements, underwriting uses a set formula to calculate usable monthly income used for qualification purposes.
To be eligible for the Bank Statement Mortgage the client should be self-employed for at least two years in the same business. An exception may be allowed for clients that are self-employed for only one year. In this case, the lender will require verification of additional reserves.
What are Reserves?
In the mortgage underwriting world, a reserve is equivalent to one month’s housing payment. The monthly housing payment includes mortgage principal and interest, property taxes, and homeowners insurance. It also includes any homeowners association dues or other required insurances (such as floods or earthquakes). On a standard Bank Statement Mortgage with a loan amount of up to $1,500,000, the required reserves are six months. For a client who has been self-employed for more than one year, but less than two, an additional six months of reserves are required.
There are some scenarios where additional reserves are required. Any loan amount above $1,500,000 requires additional reserves. Additional reserves are also required for any other property already owned by the client. The borrower will need to show an additional two months’ reserve for each additional property owned.
It is important to remember that reserves do not need to be in a liquid account. A reserve can come from a retirement account. Liquid accounts, such as checking, savings, and other investments can also be used.
Bank Statements: Personal or Business?
The great news about the Bank Statement Mortgage program is that eligible borrowers have the option to use either their business or personal bank statements. For their bank statement option twelve or twenty-four months bank statements. All eligible deposits are totaled and divided by either twelve or 24 months. The lender will also want to see three months’ bank statements from the business to verify that the deposits come from the business.
If the client prefers to use business bank statements, instead of personal statements, there are a few options available.
Business Bank Statements: Uniform Expense Ratio
The expense ratio method is a simple process. The lender will multiply all eligible deposits by 50% and then multiply by the percentage of business ownership. The lender will then divide the result by 12 or 24 months (depending on the number of bank statements used).
Business Bank Statements: Profit and Loss Statement
The borrower’s CPA can provide a Profit and Loss Statement covering the most recent 12 months. As long as the bank statements support 75% of the gross receipts listed on the report – the Profit and Loss statement can be used for qualification.
Business Bank Statements: CPA Letter
The lender will allow for an expense ratio above 50%. For the increased expense ratio a letter from the borrower’s CPA is required. The letter would be used to confirm that based on the prior 12 months the expense ratio is less than 50%.
Can Income from a Non-Self-Employed Spouse be Considered?
A non-self-employed co-borrower can be listed on the mortgage and use the income to qualify. A co-borrower with paystubs and two years W2 can have their income qualified along standard guidelines. This income can be used in addition to the bank statement income.
Loan Types?
The Bank Statement Mortgage can be used to purchase a home. It can also be used for a cash-out refinance on an existing home. For the purchase of a primary home, a qualified borrower can put in as little as a 10% down payment. There is no mortgage insurance required with less than a 20% down payment. The bank statement program can be used for either a primary, second home, or investment property. The down payment and minimum required credit score varies depending on property type and loan amount. Clients with credit scores down to 660 may be eligible for the Bank Statement Mortgage Program.