The American ethos revolves around owning a home somewhere down the road. However, individuals who are self-employed and looking to dip their toes into the real estate market often face many challenges while navigating the financing realm. Conventional loans have strict policies that create a barrier.
For example, traditional loan applications often require W-2 forms, something self-employed individuals struggle to provide. This is where bank statement loans come in, a rising trend that eliminates the need for traditional income documents. Instead, the process relies heavily on the applicant’s bank statements.
The Self-Employed Dilemma
Although self-employment provides uninhibited freedom and the potential for monetary gain, it also comes with many challenges when speaking of securing mortgages. Conventional lenders heavily fall back on predictable income, stable jobs, tax returns, and W-2 forms. Self-employed people find it very difficult to show consistent income, a stable job, and, most importantly, a W-2 form. The absence of these creates a massive struggle.
The main issue arises due to the inability of self-employed folks to document their income properly, which never meets the standards of conventional lenders. Tax returns also fail to accurately portray the financial scenario of a business owner, as reinvesting profits and making use of legal deductions blur the picture further. Eventually, even successful businessmen with substantial resources often fail to qualify for conventional loans.
For instance, an individual made $100,000 in the last financial year according to their tax returns. However, the expense investments they make get deducted from returns. This individual could have actually made double of what their tax returns show. Hence it is the bank statement that accurately shows the bigger picture rather than tax returns.
A Paradigm Shift – Bank Statement Loans
Bank statement loans have provided a breather for self-employed individuals who wish to try their hand at the real estate market. Contrary to conventional loans, these financial tools do not look for W-2 forms and proof of employment. Instead, they warrant the applicant’s bank statement over a particular period, which presents a more accurate picture.
- Lenient Documentation: Bank statement loans are quite popular due to the reduced paperwork involved as well. While other loans ask for W-2 forms, tax returns, profit and loss statements, and many more, this application process only asks for bank statements from the past 2 years. This makes compiling the necessary documents easier and also hastens the process.
- Income Flexibility: Conventional loans rely on tax returns to determine the income of an applicant. However, this may not work in favor of self-employed people as fluctuations in income cannot be measured accurately using this method. Bank statement loans take the average earnings over an extended period to calculate the income which makes this loan even more accessible. This works wonders for entrepreneurs who have their hands in seasonal businesses that see times or nil income.
- Credit Score Leniency: While credit scores are still an important factor in evaluating eligibility, bank statement loans are quite lenient in that regard when compared to conventional mortgages. Conventional loans deny eligibility to anyone who has an imperfect credit history, whereas bank statement loans consider the bigger picture and view the credit score as accompanied by the stability of income and overall financial health.
- Handy for Real Estate Investors: Besides self-employed individuals, bank statement loans also work wonders for real estate investors. As these people are involved in house flipping, property renovation, rental property management, etc, documenting the income accurately is a nightmare. Bank statement loans look at the cash flow that is generated from the income that comes in from real estate dealings, making them priceless tools in terms of financing.
Advantages of Bank Statement Loans
Bank statement loans come equipped with a range of merits that work in favor of real estate investors as well as self-employed businessmen. Let’s browse through them.
- Accessibility: Bank statement loans help keep the American Dream alive by helping realize the homeownership goal. While conventional loans bar the door against most applicants with their stringent requirements, this financial vehicle welcomes all with open arms. Not having perfect credit histories or lacking proper income documentation is not a worry.
- Quicker Approvals: The simple process followed by bank statement loans expedites the entire process and helps grant approvals quicker. Conventional mortgages often take multiple weeks or even a whole month, thanks to the load of paperwork to go through. This makes it an ideal tool to address time-sensitive deals.
- Realistic Income Evaluation: Bank statement loans uncover the true picture of the applicant’s income by perusing multiple years of bank statements. This takes into consideration the fluctuations and presents a clearer financial picture. This makes sure that no deserving candidate is denied the chance of owning a home.
- Considering Seasonal Income: Bank statement loans are also lifesavers for people involved in seasonal businesses. The facility of taking into consideration average income over a stipulated time allows seasonal business owners to become eligible.
- Helping Hand for Real Estate Investors: Bank statement loans enable real estate investors to leverage their income from the industry. This works wonders for individuals looking to expand their portfolios and make the most of the ever-evolving dominion of real estate investing.
What Do You Need to Apply for a Bank Statement Loan?
Technically, you can qualify for a bank statement loan with a credit score of as low as 620, however a higher credit score like 700 can help you fetch better terms and rate. Furthermore, applicants with lower credit scores also need to make larger down payments to gain approval as it brings down the risk shouldered by the lender. Largely, applicants are expected to meet the following criteria and provide:
- Bank statements covering the past two years.
- Profit and Loss statements from their businesses.
- A down payment of at least 10%.
- Present proof of cash reserves which are worth at least a couple of months of mortgage.
- A minimum credit rating of 620.
- Provide necessary paperwork pertaining to the business like licenses.
What is the Best Way to Apply for Bank Statement Loans?
As investors it is always imperative to compare different lenders as terms and qualification criteria may differ. Once you have narrowed down to your choice, here’s what you need to do:
- Pre Approval: Pre Approval is an important step to undertake before officially applying for a loan. This presents you with a clear picture of the road ahead. You can easily identify the areas that need work and it also lends you an idea of the loan amount you can qualify for.
- Research and Comparison: While studying and comparing multiple lenders, it is important to carefully observe the APRs, closing costs and other fees. This can help you shingle out the best offer that fits into your long-term plan.
- Final Application: Compile all the necessary paperwork after ironing out the inefficiencies and apply for the loan with the chosen lender.
Conclusion
Bank statement loans are a true game-changer in the real estate financing industry, especially for investors and self-employed people looking to buy a home. It is 2024, and the need for flexible financing options has never been greater. This financial vehicle bridges the distance between the stringent requirements of conventional lenders and the non-traditional financial profiles of businessmen.
Munshi.Biz offers an attractive bank statement loan package. The rate of interest is quite competitive and can be further brought down by an applicant’s robust financials. So call in today and get your personalized consultation.
