Recent times have seen a paradigm shift in the real estate playground, especially with the rising popularity of bank statement loans. While this financial solution was deemed non-traditional, it is rising as a viable option once more. It gives self-employed investors the ability to own a home. In this article, we will dive deep into bank statement loans and learn and understand their merits and demerits for self-employed households trying to make it in the real estate market.
Understanding Bank Statement Loans
A bank statement loan is perfect for a mixed-income household. Any household featuring one or more unconventional sources of income qualifies as a mixed-income household. Event managers, gig-based earners, small business owners, and many more people fall under this category. While these setups are becoming increasingly popular, lenders are facing issues providing financial solutions that are perfect for people with non-traditional sources of income.
To tackle this issue, modern-day lenders have come up with a unique hack known as bank statement loans, which fits into mixed-income homes like a glove. The basic gist behind the functionality is simple: instead of putting in W-2 forms, income documentation, tax returns, and whatnot, self-employed individuals simply need to submit their bank statements for a specific period (6 months or a year). This then works as proof of income to sanction the mortgage.
Who Qualifies For A Bank Statement Loan?
Although the thought of a bank statement loan is tempting, not every applicant can be eligible for one. To ensure financial stability, lenders generally peruse an applicant’s bank statement for regular deposits. Even money saved up for business development is considered for repayment ability. However, these criteria vary from lender to lender.
However, here are some general requirements applicant must address:
- Bank statements of up to the past 24 months.
- Details of the Profit and Loss account of your business.
- Minimum down payment of 10%.
- Have adequate positive cash flow.
- A minimum credit score of 620.
- Details of your business and all relevant paperwork.
Advantages Of Bank Statement Loans
- Minimum Requirements: The top advantage of a bank statement loan is that applicants can qualify by simply submitting their bank statements from the past year or two. Additionally, sharing income receipts, tax returns, and other paperwork is not required.
- Low Down Payment: Bank statement loans are also very useful for investors with limited means because they only ask for 10% as a down payment. This allows investors to obtain the low with a minimum upfront investment, leaving them more money for other endeavors.
- Widening the Investor Base: Bank statement loans also work wonders for international investors looking to cash in on the US market. While they may have non-traditional and complex financial situations, even deposits into their accounts add to their repayment ability. Additionally, international investors will never be able to produce a W-2 form anyway.
- Below Average Credit History: This financial solution works with investors who have a bad credit history. Although creditworthiness is important for approval, positive cash flow often trumps that and lets people with a less-than-perfect credit history get a home.
- Low Taxable Income: Bank statement loans also work for people with income streams that feature a lot of write-offs, decreasing the taxable income because approval greatly depends on the cash flow.
When To Choose Traditional And When To Choose Bank Statement Loans?
While the understanding may be clear, there are certain circumstances that leave you perplexed. Hence, let’s go through a few cases which clearly outline which option you should go with. When you have a stable job that generates a set amount each month, you should undoubtedly go for more traditional options as they will have more favorable terms. On the flip side, if you are self-employed or a business owner, you can go with bank statement loans, as they do not call for traditional income verification methods. If your credit score is good or even above average, you should always go with traditional financial solutions rather than bank statement loans, as the rate of interest and repayment terms will be quite favorable.
If you are buying a home for the first time in your life, traditional loans have amazing offers that feature lowered down payments, interest rates, and a lot more.
Disadvantages Of A Bank Statement Loan
While there are many upsides to this financial solution that has suddenly risen from the ashes, there are a few cons to consider as well. To begin with, bank statement loans often come with the drawback of higher down payments. Compared to the 3%-5% requirement of normal loans, these call for at least 10%-15%.
Interest rates are also approximately 2%-3% higher than traditional financing options when speaking of this tool. This is because lenders can’t sell the mortgage to others, and keeping it to themselves is way riskier. The Consumer Financial Protection Bureau does not oversee what goes on with bank statement loans as it does with other government-backed loans. This is similar to buying eggs from a farmer’s market rather than a departmental store, so you need to know what you are getting into.
Since they have recently sprung back to life, lenders offering this solution are many, but which one is the best is something difficult to find. Bank statement loans often involve a more in-depth review of your financial activity than typical banking transactions. Understanding what information the lender will access and taking steps to protect your privacy is important.
Conclusion
We have clearly understood the gist, advantages, and disadvantages of bank statement loans, along with learning when it is wise to opt for them. That said, it is very important to consider who you choose as your lender or financial partner in such scenarios. Call Aminsh Munshi, and we’ll tell you why a team player is more important than just a mere lender.
