Non-Traditional / Non-QM Programs: Bank Statement Programs
Bank Statement Mortgage Programs are designed for self-employed individuals, business owners, or others with non-traditional income sources who may not qualify for conventional mortgages due to the difficulty in documenting their income through traditional means like W-2s or tax returns. Instead, these programs use bank statements to verify the borrower’s income and assess their ability to repay the loan.
Key Features of Bank Statement Mortgage Programs
Income Verification Through Bank Statements:
- Borrowers provide personal or business bank statements, typically covering 12 to 24 months, to demonstrate their income.
- Deposits in these statements are analyzed to determine the borrower’s average monthly income.
Who Uses These Loans?
- Self-employed individuals, freelancers, contractors, or gig economy workers whose tax returns might not fully reflect their actual income due to deductions or variable income.
No Traditional Income Documents Required:
Unlike conventional loans, borrowers are not required to provide:
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- W-2s
- Pay stubs
- Tax returns
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Higher Loan Limits:
- These programs often allow for higher loan amounts compared to traditional loans, making them attractive for high-income self-employed borrowers.
Down Payment Requirements:
- Down payments typically range from 10% to 20%, depending on the borrower’s credit score, income, and other factors.
Credit Score Requirements:
- Minimum credit scores usually start around 620, but a higher score (700 or above) may result in better terms, such as lower interest rates.
Interest Rates:
- Interest rates are generally higher than those of conventional loans due to the increased risk associated with non-traditional income verification.
Debt-to-Income (DTI) Ratio:
- DTI is still a factor, but lenders may calculate it differently for bank statement loans. Some lenders allow higher DTI ratios than conventional loans.
How It Works
Submission of Bank Statements:
- Borrowers submit 12-24 months of personal or business bank statements to the lender.
- Only deposits are considered as income, and large deposits may need to be explained or excluded if they are non-recurring.
Income Calculation:
- Personal Bank Statements: Lenders use 100% of eligible deposits to calculate monthly income.
- Business Bank Statements: A percentage of deposits (usually 50%-75%) is considered to account for business expenses, unless specific proof of lower expenses is provided.
Other Factors Considered:
- Credit history
- Down payment amount
- Reserve requirements (borrowers may need several months of reserves for approval)
Benefits of Bank Statement Mortgage Programs
Flexibility for Self-Employed Borrowers:
- Tailored for those whose tax returns don’t reflect their full earning potential due to deductions and write-offs.
No Tax Returns or W-2s Needed:
- Simplifies the application process for self-employed individuals.
Higher Loan Limits:
- Ideal for borrowers needing larger loan amounts for high-value properties.
Customizable Loan Terms:
- Borrowers may have options for fixed or adjustable-rate loans.
Drawbacks of Bank Statement Mortgage Programs
Higher Interest Rates:
- Reflect the increased risk for lenders due to non-traditional income documentation.
Larger Down Payment:
- May require more upfront capital compared to conventional loans.
Limited Lender Availability:
- Fewer lenders offer these programs compared to traditional mortgage products.
More Stringent Documentation on Bank Activity:
- Borrowers may need to explain or exclude certain deposits or account activities.
If you’re looking to explore bank statement programs for a specific mortgage scenario or lender program, let us know, and we can provide tailored advice or calculations!
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