Sometimes you can’t prove your income the standard way. In other words, you don’t have paystubs or W-2s to provide. You likely have tax returns, but if they don’t reflect your true income, it could be hard to qualify for a loan. Luckily, you are not out of luck. There’s one more way to qualify for the loan with your bank statements.
Some subprime lenders allow this alternative form of income verification. It’s not for everyone, but if you are self-employed or work on commission, it could give you better results than trying to use your tax returns for qualifying.
How Bank Statements Qualify you for a Loan
Bank statement loans are subprime loans. They don’t have to abide by the Ability to Repay Rules. In other words, a lender can use this alternative form of income verification to qualify you for a loan.
If you are a seasonal employee, work on commission, are an independent contractor, or work for yourself, this is a good option. Typically, your tax returns don’t reflect what you truly make. You likely take a large number of deductions in order to reduce your tax liability. While that’s perfectly legal, it hurts you when it comes time for mortgage approval. A lender must use the net income claimed on your tax returns. Rather than using that income, though, the bank statement loan allows the use of your bank statements instead.
Rather than looking at your net income on your tax returns, your lender will look at the deposits you made on a monthly basis in your bank account.
Typically, lenders go back over the last 24 months. This helps them see the pattern of your income. For example, let’s say your business is seasonal. You are busy during March – September, but are slower from October through February. If the lender were to use just the income from March through September, your income would seem inflated and you might qualify for more than you could afford. If the lender used the income from October through February, you might not qualify for the loan. Using at least a 12-month, if not a 24-month average evens everything out.
Qualifying for Bank Statement Loans
It’s not just your income on your bank statements that qualifies you for the loan. your other factors play an important role. Remember, lenders are taking a risk by giving you a loan based on your bank statements and not your tax returns. They are going to look for compensating factors.
A few good ones include:
- Great credit – The higher your credit score, the more financially responsible you seem to the lender. The fewer late payments and defaults you have, the less risk you pose to the lender. This allows the lender to approve you for a lower rate and/or lower closing costs.
- Few debts – Minimizing your debts before applying for a bank statement loan helps your case as well. The lower debt ratio gives lenders a lower risk in lending you money for a home.
- Lots of reserves – The more money you have on hand, the less risky you become. If a lender knows you have a backup source of funds to pay the mortgage, they will be more likely to lend you money for a home purchase or refinance.
Finding the Right Bank Statement Loans
Once you get your qualifying factors under control, it’s time to find the right bank statement loan. Because it’s a subprime loan and doesn’t fall under the Qualified Mortgage guidelines or the Ability to Repay Rules, lenders may charge more for the loan.
This doesn’t mean you have to overpay to get the loan. You have the right to shop around. Just because it’s a subprime loan doesn’t mean you should pay excessive points or fees. Instead, work on your qualifying factors. Make sure your credit score is as high as you can get it and your debts are as low as possible. Save as much money as you can too so that you have a backup should your income stop suddenly. Each of these factors help a lender give you a lower interest rate and/or fees.
Keep Your Bank Statements Straight
There are a few things you should consider when getting your bank statements in order:
- Keep your business deposits as consistent as possible, trying to stick to the same day every week or month if possible
- Watch your large withdrawals as the lender will question them
- Watch any extraordinary deposits that don’t coincide with your regular income, have an explanation and paper trail regarding its origination ready
- Don’t mix your business income with your personal income; use one statement or the other for qualifying purposes, not both
You can qualify for a mortgage using just your bank statements, but you will need other qualifying factors. The less risk you pose to a lender, the higher your likelihood of approval despite your lack of standard income verification.