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How does a bank statement loan work?

August 25, 2020
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by Christian Perez
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Sept. 20, 2020
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A bank statement loan is a mortgage for which the underwriter uses the borrower’s bank statements to verify and evaluate income.

Bank statement loans are designed for borrowers who are not able to document their income using pay stubs, tax returns and other income verification documents required for a qualified mortgage. The bank statements provided with the loan application must be consecutive and cover the 12 to 24 months immediately prior to the application.

Here’s a closer look at what bank statement loans are and who they can benefit.

What is a bank statement loan?

A bank statement loan is an alternative to traditional mortgage products. These loans make it possible to gauge a buyer’s ability to repay a loan based on their bank statements and banking history in place of income that’s reported on W-2’s, pay stubs or tax returns.

Some creditworthy borrowers who don’t qualify for other types of loans can qualify for a bank statement loan instead. This type of loan can be a great backup mortgage option for self employed clients.

Good candidates for bank statement loans include small business owners and self-employed individuals.

How do bank statement loans work?

Bank statement loans are not typical mortgages. For typical mortgage loans, the applicant provides standard documentation to verify income. That includes two years’ tax returns and W2 statements, 2-3 months’ bank statements, and at least 30 days’ worth of pay stubs. Small business owners and self-employed individuals are often unable to satisfy these documentation requirements.

A bank statement loan requires much less documentation. The borrower’s ability to repay is based on an analysis of the money going into and out of his or her bank statement each month over a period of time. Business bank account statements are used most often, but this type of loan can also be made based on personal bank statements. This flexibility accommodates, for example, sole proprietors who do not maintain separate business and personal accounts.

At Quontic, 12 consecutive months of bank statements are required, and they must be dated within 90 days of loan closing. Borrowers may apply using personal or business bank statements. An applicant using business bank statements may also be asked to provide the personal account statements to which funds are transferred from the business account. An underwriter will validate the statements.

Who can use a bank statement loan?

Being self employed can add a wrinkle to the mortgage process because of the income verification requirements for a qualified mortgage. Someone who’s been a business owner for less than two years, for example, or a gig worker whose income ebbs and flows may run into more challenges than other buyers when it comes time to document income.

A bank statement loan can be a good option for applicants who are not able to qualify for other types of loans. At Quontic, this program is specially designed for applicants who miss the FICO score cutoff for the CDL Lite Doc loan programs (owner-occupied and investor options).

Bank statement loans can be appropriate for a variety of buyers, including those with less than perfect credit scores or uneven income, as deposits are averaged. They can work for people with traditional 9 to 5 jobs or not-so-traditional employment.

Bank statement loans can help to fill funding gaps for buyers who may not be able to get approved for other loans. They can also be suitable for people with lower FICO credit scores who need a fair credit home loan option.

Bank statement loans are one of many non-QM options

While bank statement loans can help certain buyers to secure a mortgage, it’s important to remember that they’re just one possibility for funding. In many cases, borrowers may be qualified for other types of loans even if they have below average credit scores or a higher debt to income ratio.

Quontic’s owner-occupied and Investor Lite Doc Loans, for example, can be used to purchase residential or investment properties. These loans don’t require W-2s or tax returns; instead, our underwriters verify income for self-employed buyers based on self-reported profit and loss statements and the current month bank statement. For salaried buyers, the focus is on current income. We can approve applicants with up to a 50% debt to income ratio, and we allow for up to 100% of down payment funds to be gifted.

Every borrower deserves to find the right home loan solution, and in many cases, borrowers are more qualified to get a mortgage than they might think. Whether it’s for a primary residence or an investment property, having more loan options is a good thing. A full menu of options helps brokers identify the best mortgage option for each client.

The end goal is to help your client find the right mortgage loan for their situation. If you’re interested in learning more about Lite Doc Loan options, contact Quontic today.

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