If you are a self-employed borrower, you probably think you have limited options when it comes to qualifying for a refinance loan. You probably think you are even worse off if you write off a lot of expenses on your tax returns. Lenders have to use your adjusted gross income, which can be next to nothing if you are like most business owners and write your expenses off.
Luckily, there is another option for you, the self-employed borrower. You can opt for a bank statement refinance. This program allows you to use your bank statements in place of your tax returns. This allows you to qualify for the loan with the full amount of your income rather than whatever is left after writing off your expenses.
You’ll have to use a portfolio lender if you want to use this program, though. This is not a conventional or government-backed program. You need a lender that writes non-Qualified mortgages. They are not bad mortgages, by any means, they just have different requirements.
Qualifying for the Bank Statement Refinance
In order to qualify for the bank statement refinance, you must supply the lender with the last 24 months of your bank statements. The lender will go through the statements and determine your monthly income based on the deposits made.
It helps if your income is deposited in regular intervals, so that the lender can easily spot your income. Your lender will take the total of the income over the last 24 months and divide it by 24. This will give them your average monthly income. This allows them to account for the highs and lows that many self-employed borrowers experience.
You may also have to supply the lender with a YTD Profit & Loss Statement. This helps the lender see that you are on track to make the money that you averaged within the last 24 months. It’s like a verification of employment that a lender would perform if you were employed by someone. They would collect your paystubs and W-2s, but they would still call your employer to make sure you are employed. It’s the same idea with the P&L because it doesn’t make sense for the lender to call you and ask you if you are employed.
Other Qualifying Factors
Because bank statement loans are a portfolio lender loan, each lender will have their own requirements. You can expect any of the following though:
- Credit score of at least 580 – Again, this will vary by lender, but the lowest score you will likely qualify with is a 580. The higher your credit score, though, the fewer other requirements you’ll have to meet. A higher credit score shows a lender that you are financially responsible and that they have less to worry about.
- Debt ratio maximum of 50% – Many portfolio lenders allow borrowers to go above the Qualified Mortgage guideline of a 43% debt ratio, allowing you to have a 50% DTI. This too will vary by lender, but it’s likely you’ll find a lender willing to go this high.
- LTV of 90% – You may have to have more equity when you secure a bank statement loan than you would any other loan. This is to offset the riskiness of the loan. The more equity you have, the more likely it is that you’ll make the payments. This requirement will vary by lender.
Make Your Application as Attractive as Possible
The key is to make your application as attractive as possible. Your bank statements should be easy to read, giving the lender a quick idea of how much money you make. You should not co-mingle your personal and business accounts, either. Keep them separate, making it very obvious how much money you make by looking at your personal accounts alone.
In addition, giving the lender as many compensating factors as possible will increase your chances of approval. A higher credit score, lower debt ratio, or plenty of assets on hand are great ways to reassure a lender that you can afford the loan no matter what happens to your income in the future.
A bank statement refinance loan for a self-employed borrower is easy to come by and even easy to obtain as long as you meet the minimum requirements. Self-employed borrowers have much easier access to refinance loans today than they did a few years ago as more and more lenders start to adapt to the idea.Click to See the Latest Mortgage Rates»