Do you have irregular income or maybe you don’t work at all, but you know that you could afford a mortgage? You probably won’t be able to qualify for a traditional mortgage if you don’t have W-2s or tax returns for a lender to confirm your income, but you may be able to get away by just using your bank statements.
While you won’t be able to get a conventional, Fannie Mae loan with your bank statements alone, you can get an alternative loan or subprime loan this way. Don’t think that if it’s a subprime loan that you have to deal with crazy high interest rates or excessive fees because that’s not the case. There are programs that give you the flexibility of using your bank statements for income approval while not overcharging you for the loan.
Keep reading to learn how it works.
What You Must Provide
First, you should know that you must provide at least 24 months of bank statements for this to work. This gives lenders the chance to see a solid history of your income earnings. What they look for on your bank statements is consistent deposits of about the same amount. In other words, they want to see your income deposited in your bank account.
If you work on commission, own your own business, or just have irregular income, you can let the lender know what you got paid and when. This can help them decipher the deposits on your bank account. Of course, it helps if the deposits clearly show that the money came from your place of employment or your business.
Lenders will also look through the bank statements for any extraordinary deposits. These are large deposits that don’t coincide with the amount of income you said you made. This could send up a red flag for the lender because they could think that you took out a loan to get the money to qualify for the loan. If you have any large deposits that don’t tie into your employment, be prepared to explain it, possibly in writing.
Figuring Out Your Income
Once the lender sees your income on your bank statements, they will take an average of it over the 2 years. This gives them a good balance between the highs and lows that your income may experience throughout the seasons.
You might think that it’s not fair if they qualify you on average because it’s lower than the income you make right now, but it’s to protect you. The average takes into account both the highs and the lows and finds the middle ground. This way they don’t qualify you for a mortgage that you can’t afford or qualify you for less mortgage than you can afford.
Other Factors You Should Have
In order for a lender to accept the riskiness that comes along with a bank statement loan, they typically want to see compensating factors. These factors include:
- High credit score – If you can show a lender that you are a good financial risk by having a high credit score, you have a better chance of securing the loan. When a lender sees that you pay your bills on time and that you don’t overextend your credit, they will feel better about giving you the loan.
- Low debt ratio – Again, lenders don’t want to see you overextended. They will compare your gross monthly income according to their calculations to your current debts. They will also include the potential mortgage payment. They like to see debt ratios around 28% for your housing ratio and 36% for your total debt ratio. There are exceptions to these rules and some lenders allow higher ratios, but they can serve as a good guide to help you along.
- Large down payment – The more money you can invest in the home yourself, the better your chances of getting the loan become. When you invest your own money, you show the lender that you are serious about buying the home and staying current on your mortgage payments. With your own money invested, you have a lot to lose if you don’t make those payments.
- Reserves on hand – The more money you have in savings, checking, or a liquid investment account, the more reassured the lender feels about you making your payments. Reserves show a lender that you can handle what life throws your way and that you are a low risk of default.
The bank statement loan is a possibility from a variety of lenders. While it’s not the right loan for everyone, it can help you get the approval you need if you are self-employed, work on commission, or are retired.Click to See the Latest Mortgage Rates»