Not common but a less known type of financing is the bank statement loan. What are they? I got this question from a small business owner recently who was trying to purchase a home. They are essentially a type of loan that allows a buyer to get a mortgage without the traditional documents (taxes, paystubs, etc.) that most loans need in order to prove your income. They are also sometimes known as “self-employed mortgages” or “alternative documentation loans.” I’ve had a lot of experience with recently minted small business owners and 1099 (independent contractor) who become frustrated that traditional lenders won’t lend to them due to a lack of “track record”.
Let’s look at the different types of borrowers who could benefit from this type of loan.
Self-employed: These are the most common borrower for this type of program because they are able to prove that they make an income without having to use paystubs as verification. It may seem like tax returns are the next obvious form of verification, but sometimes things aren’t as they appear because self-employed people have a net income they actually make as well as a net income they claim. This type of program allows the borrower to provide 12 months of bank statements to show the regular receipt of income. A lender will still need to see expenses, but they will no longer penalize the borrower for what is written off a tax return.
Seasonal workers: This country has many of them and usually means they spend a single season making their entire year’s income. Traditionally, a lender would take what the borrower made in a season and annualize it to see how much they have made in a year. This makes the monthly gross income smaller, therefore making it nearly impossible to qualify for a loan. The bank statement loan would still annualize the income, but you can also use any other income you bring in on a regular basis as shown on your bank statements. You must hold a seasonal job for at least two years in order to use the income.
Commissioned Employees and Salespeople: Commission is not a regular receipt of income, some months you make more, some months you make less. Similar to the seasonal worker, your total income will be annualized by a traditional lender, and your many write-offs will greatly decrease the total amount of income you can use to qualify for a loan. When using a bank statement to prove income, the lender generally will deduct far fewer expenses, giving you a better chance of approval.
If you have decided that bank statement loans are the best option for you, you should apply with several lenders and compare. Many people believe that bank statement loans are going to offer worse terms than a traditional loan, but that is not always the case. Each loan has its own advantages and every lender and loan are different, so it’s in your best interest to work with a professional to explore the best options for your circumstances. Of course, I have lenders who can advise on these types of loans and get you into the best lending situation.