The COVID-19 pandemic has caused upheaval in the mortgage market as millions of Americans have lost their jobs. Lenders have tightened their standards for Fannie Mae, Freddie Mac, FHA, and VA-backed loans. But what about bank statement loans? If you are self-employed with an unstable income, you may need to rely on bank statement loans to get a mortgage.
Bank statement loans are still available, but you can expect lower loan-to-value (LTV), meaning higher down payments, higher credit score requirements, and more reserve requirements. The higher your credit score, the higher the LTV ratio will be permitted by your lender.
Below is everything you need to know about bank statement loans in 2020.
Bank Statement Loan Overview
Bank statement loans, also called self-employed mortgages, allow a consumer to get a mortgage without documentation usually needed to verify income, including W-2s and tax returns. These special loans are also sometimes referred to as alternative documentation loans. They are used by entrepreneurs and others who may not have a single employer or consistent income to prove their salary.
These loans are not qualified mortgages, so lenders can apply their own qualification standards to loan applicants instead of applying a standard set of requirements used by all mortgage lenders.
As the gig economy has taken off in the past five years, there are an estimated 15-27 million Americans who get some or most of their income from self-employment.
There are some lenders in 2020 that still offer bank statement loans, which offer more flexible options to prove income and assets.
Bank statement loans tend to be portfolio loans. This means that the lender is not selling the loan to a larger bank and will service the loan for its full term. So, the lender can establish its own criteria for lending and not what Fannie Mae, Freddie Mac, or FHA require.
How Do Bank Statement Loans Work?
Conventional mortgage lenders usually require you to submit the following documents to prove your income:
- Tax returns
- Pay stubs
- Employer verification loans
On the other hand, bank statement loan applicants can use business or personal bank accounts to prove cash flow and income. You will still need to provide some of the same documents as you would for a standard mortgage loan, and perhaps more.
Requirements vary by lender, but typical standards for a bank statement loan for 2020 are:
- 12-24 months of personal or business bank statements.
- A business profit and loss statement may not be required, but you could provide one to provide support for your application.
- LTV of no more than 75%; some professionals with lower credit scores may be limited to 65% LTV.
- Two years’ work history as a self-employed professional. You will need to show that you have been in the same business for at least two years, and some lenders may now require longer work histories.
- Acceptable credit scores, which now are in the high 600s.
- Sufficient cash reserves to cover several months’ mortgage payments.
- Verification of liquid assets, such as mutual funds and 401(k).
- Business license, if required by law.
- A letter from your CPA that validates your company’s business expenses and confirms you file tax returns as an independent contractor.
These loans are riskier for mortgage lenders, so you may need a bigger down payment and have a higher interest rate. Rates may be .5% to 1% higher than a standard mortgage.
Exact bank statement loan requirements vary by lender. For example, some lenders may accept lower FICO scores than others. If you do not meet the requirements for the lender, be sure to check with others.
Who Can Benefit from a Bank Statement Loan?
Bank statement loans are popular with clients who have irregular cash flow or cannot obtain income documentation from an employer. The most common professionals who seek bank statement loans are:
- Small business owners
- Real estate investors
- Real estate agents
If you work in one of the above professions, you might not be able to qualify for an FHA or conventional loan because the income shown on your federal tax returns may not reflect your true income; many self-employed workers adjust their taxable income with deductions and tax write-offs.
A current homeowner can use bank statement loans when refinancing their mortgage. If you are not working in the regular job market but still want to refinance, talking to your lender about a bank statement loan could be a smart choice.
Other Mortgage Loan Options
Not every self-employed professional need a bank statement loan. Some can be approved for conventional or FHA loans. Most lenders will check your income by verifying your tax returns for the last two years. If you have been working for yourself for years and have a steady income, you may be able to get a conventional home loan.
In the uncertain COVID-19 economy, you can bet on needing a higher credit score and bigger down payment, whatever type of mortgage you get. Also, most mortgage companies are requiring at least a 660 or 680 credit score to get an FHA loan, and conventional lenders may require a 700 or higher FICO score.
Bank statement loans are still an option in 2020, even with all of the financial upheaval from the coronavirus. However, you can expect to need a higher credit score, bigger down payment, more reserves, a higher interest rate, and more scrutiny of your income.
Your odds of approval are higher with a higher credit score and years of self-employment. Lender requirements vary for bank statement loans, so talk to several lenders to see if you can qualify for a bank statement loan.