The term subprime loan seems to be a phrase of the past, but it is slowly making its way back into the forefront of the mortgage industry today. The main difference is that you might not hear the word subprime; what you might hear instead is alternative documentation loan. It is the same thing essentially – there are just a few different stipulations lenders require in order to cover their backs today. In other words, you are not going to find a true No Income, No Asset loan, but you will find similar products that enable those that are self-employed or have fluctuating income to get a home loan. The first step is knowing how to prepare for this type of loan.
Have your Bank Statements Ready
Alternative documentation loans typically mean that you do not have tax returns to provide the lender for qualification purposes. If you do have them, they probably do not reflect the true amount of money that you make on a yearly basis. Whether this is due to business expenses that you write off in order to decrease your tax liability or non-reimbursed employee expenses that you write off for your commission based job, on paper it looks like you make a lot less than you do. Because lenders always take the amount submitted to the IRS as your income, you would be less likely to get approved for a loan with this lower income amount. This is why bank statements are so crucial.
In order to have them ready, you basically need to take time because lenders require 24 months of consecutive bank accounts in order to qualify. If you have not been in the same line of business or have not owned your business for the last 24 months, you might have to wait until you have 2 years under your belt before applying for the subprime loan.
Aside from needing 24 bank statements, you have to watch what they say, meaning that you need ample reserves to show the lender. One of the best compensating factors for self-employed or commission based employees is reserves beyond the standard monthly payment. If your bank statements show that you have at least 3 to 6 months’ worth of income set aside, you will look less risky to them because this means you can make your mortgage payment even if something were to temporarily happen to your income.
Get a P & L
A Profit & Loss Statement can speak volumes to a lender that is going to offer you a subprime loan. The P &L will show the lender that your business is in good standing and has control of its money. Showing the money that comes in and out of your business is a way to show that your business is legitimate and the money that you have in your bank accounts that you are using to qualify for the loan is truly from your business. Typically, a P & L created by a third party, such as a certified accountant, is the most valuable piece of information for the lender.
Have Cash Available
Because the subprime loan is a riskier loan than your standard conventional or government backed loans, you should have plenty of cash available to put down on the home. Most lenders want a higher down payment than you would find in an FHA or Fannie 97 loan. This is simply because the higher the down payment that you use, the more money you have invested in the home. This gives the lender better peace of mind that you are going to stay on time with your payments and not just walk away from the home that you have little invested in if and when your job status changes.
The subprime bank statement loan is a great way to get into the home you desire. More and more banks are offering this program in one form or another today. Shop around with different lenders to see what they have to offer as there are many different ways it can be done as well as many different costs that can be charged on this type of loan.