Is a Bank Statement Loan the Right Option for Me?

Did you know the Tampa Bay area is one of the hottest places for self-employed people to set down roots? According to Forbes, it’s rated 2nd best for young entrepreneurs. As a community and culture that makes people and connections accessible, more and more sole proprietors, contract workers, and freelancers are moving to the area and looking to buy a home. 

Chances are, if your flexibility has allowed you to relocate to this tropical paradise as a self-employed business owner or 1099 contractor, you are ready to stay. You’ve probably perused the market watching those upscale townhouses in the Channel District, Florida-style bungalows in Port Tampa, or the house of your dreams in Palma Ceia going up for sale. But you might have hit a few mental roadblocks as you’ve started considering financing a new home and qualifying for a loan based on self-employed income.

What’s the Lending Challenge for Many Self-Employed Individuals?

Working for yourself can often present a challenge in determining the right home loan that accurately reflects your income. If you claim many tax deductions, your reported income may appear skewed, looking smaller than it actually is. 

A second challenge for self-employed individuals is their pay frequency or lack of regularity. If you get paid for project-based work or on infrequent but large sales, it can be tricky for you to satisfy the documentation requests from the bank for a traditional mortgage.

So, when it’s time to purchase your house, you may hit dead ends with traditional lending processes and products. How, then, can you find the right mortgage that considers your actual income? Enter the bank statement loan.

What exactly is a bank statement mortgage, and how is it determined?

If a traditional loan requires proof of income from pay-stubs and employers’ W-2s, with a bank statement loan, the borrower shows proof of income through qualified business deposits. 

Providing bank statements to document your deposits, charges, and withdrawals over a 12-24 month period enables the lender to see your financial activity more accurately. Their review, in turn, allows them to calculate a monthly income average from these bank statements, which is the method most lenders use when determining income for this loan type. They’ll be looking for sourced business deposits, meaning your lender recognizes that certain deposits are consistent in dollar amount, type of deposit, as well as where the deposit originated from, while excluding any non-income deposits, such as bank-to-bank transfers or loan deposits. Aside from using the business deposits to calculate income, your lender will also want to review personal asset statements, separately, to ensure the appropriate funds are available for downpayment and closing costs. In some cases, business assets can also be used for this purpose as long as the business can verify the liquidity of assets from a balance sheet or a CPA can confirm that a withdraw of funds from the business account, for closing costs purposes, will not impact the financial stability of the business.

Similar to qualifying for a conventional loan, lenders will also take credit scores, assets, and the history of the business into account. Depending on the lender, a business will typically need to show that it has been established for a minimum of 2 years.

Lenders only consider a percentage of the money recorded as deposits. They assume some of that money is business expense related, and so they figure a percentage (25%-50%) of the total deposits as your income. The percentage used also depends on how many individuals own the business. For example, if you deposits averaged $90,000 for a year, 50% of $90,000 would be considered your gross income for an individual owner. The lender would factor in $45,000 as your yearly gross income. Depending on the lender and business, personal account bank statements may be accepted for review, but some lenders will only allow business bank statements to be submitted.

Once the gross income is calculated, the lender factors monthly debt payments to determine your debt-to-income ratio and your qualifying loan amount. 

Here are a few items to know if you might seek a bank statement loan in the next several months.

1. Keep your business and personal accounts separate. This simple measure will make your mortgage process easier for all.
2. Be ready to explain large withdrawals or deposits. The law requires that lenders make good-faith attempts to determine whether borrowers can make their mortgage payments. When they ask you questions, it’s for this reason.
3. Watch your balances and prevent overdrafts. Overdrafts don’t look good when applying for a bank statement loan. Overdrafts can appear to a lender that you are living above your means or can’t make monthly ends meet. 

Who should consider a bank statement loan, and how do you apply?

As mentioned, self-employed individuals claiming larger tax deductions are good candidates for these types of loans. A bank statement loan might be the perfect financing solution if you are a contract worker, freelancer, or sole proprietor. Even seasonal workers can benefit from these loans because the deposits are calculated as an average during a period of time: Exactly when the cash deposits is less critical.

Now, some of these details may seem overwhelming to you. The great news is that they are NOT to us! At Moonlight Mortgage, we are passionate about helping self-employed people create a lending strategy that works for them to get into their dream homes! Contact us today, and we’ll determine if a bank statement loan is your best option for you!