Acquiring a mortgage is a key step towards achieving the goal of owning a home. In recent times, the real estate realm has evolved, and now investors have a plethora of options to choose from as far as financing options are concerned. However, two among the sea of choices stand out as favourites: bank statements and conventional loans. In this blog, we will learn more about what these types of loans have to offer, what the ramifications associated with each are, and how they are advantageous.
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The Basics
Bank Statement Loans
Bank statement loans are devised for individuals with non-conventional streams of income or those who have difficulty presenting the documentation required for conventional lending options. Business owners, freelancers, gig workers, and other self-employed individuals find this a great option due to the minimal documentation required for approval.
Top Features
- Alternative Documentation: Completely different from conventional loans, this tool only asks for the borrower’s bank statement from the past one or two years. Applicants do not need to worry about submitting tax returns, W-2 forms, etc.
- Credit Score Leniency: While having higher creditworthiness is advantageous to score a better deal, bank statement loans also allow individuals with lower-than-normal scores to apply.
- Debt-to-Income Ratio Stringency: While conventional loans are quite strict with the DTI ratio, bank statement loans are quite lenient. People with higher DTI ratios are also accommodated.
Advantages
- Includes the Self-Employed: Self-employed investors face challenges while matching up to the standards expected of conventional loans. Bank statement loans, on the other hand, make life a lot easier and are more accessible.
- Flexible Income Recognition: With bank statement loans, applicants can add deposits, rental income and savings to the income list as well.
- Speedy Approval Times: Since the requirement of paperwork is so low, bank statement loans do not take too much time to get approved.
Conventional Loans
Conventional loans are also sometimes referred to as conforming loans. Banks, credit unions and mortgage companies always offer this service. The terms and conditions are heavily influenced by Freddie Mac, Fannie Mae and other Government-Sponsored Entities.
Top Features
- Heavy Documentation: W-2 forms, tax returns, and proof of assets are commonly asked for while applying for a conventional loan.
- Stringent Credit Score Requirements: Higher creditworthiness is a must to apply for and score a conventional loan. This also excludes people with no credit history.
- Fixed or Fluctuating Rates: The ability to choose between a fixed and alternating rate of interest is a key feature of conventional loans. This allows borrowers to either opt for stability or wait for the opportune moment and cash in.
Advantages
- Lower Rates: Conforming loans often offer very low asking rates when compared to other options. This is due to the fact that the lender has more clarity courtesy of the many documents submitted.
- Higher Limits: While not the highest, conventional loans do offer quite a substantial sum, which is definitely more than some government-backed schemes.
- No PMI: Private Mortgage Insurance is a must these days. However, in the case of conventional loans, borrowers can cancel them after reaching a set level of equity.
Bank Statement and Conventional Loans: Head to Head
· Suitability
Bank statement loans are catered towards self-employed entrepreneurs who have varying sources of income and face challenges while documenting them. Conventional loans are designed for people with great credit scores, stable incomes and jobs. This option is the most commonly opted-for financial solution.
· Documentation
Bank statement loans, as the name suggests, only ask for the bank statement of the applicant. Statements from the past one or two years are all the individual needs to provide. Conventional loans ask for a load of documents ranging from W-2 forms to income tax returns, asset proofs, etc.
· Credit Score
Individuals with no credit history or a weak credit score can also apply for a bank statement loan. However, a good score can help fetch better repayment terms. Conventional loan lenders prefer safety. Hence, they ask for higher scores.
· Debt-to-Income Ratio
Bank statement loans also accommodate borrowers who have a wonky DTI ratio. Higher ratios imply more debt and less income. Conventional loans, however, are quite strict with their demands and do not budge easily. There is a bar in place to safeguard lenders.
· Interest Rates
Since bank statement loans offer so much and ask for so little in return, the cost of financing is higher when compared to conventional loans. The rate of interest is always higher. As conventional loans are the most commonly opted-for tool, and the fact that they go through each document to provide clarity, the rate of interest is relatively lower.
· Loan Limits
While limits completely depend on the lender and the borrower’s financial scenario, bank statement loans rarely offer more than conventional options. Although standardised by the policies set by GSEs, conventional loans can help fetch quite a substantial amount, which is often more than bank statement loans.
Choosing What’s Right for You
· Type of Income
If you are self-employed and have trouble documenting your income, bank statement loans are a great option. It also takes into consideration alternative forms of income. On the other hand, a conventional loan can be opted for if all your paperwork is in place.
· Credit Profile
If you have a weak credit history or do not have one at all, bank statement loans can still accommodate you. On the other hand, a strong credit score can help you secure amazing terms while opting for conventional loans that already offer low rates of interest.
· Financial Goals
If you aim to score a mortgage as quickly as possible and with the least amount of paperwork involved, bank statement loans are your go-to option. Conversely, if you have a long-term goal that involves saving up on financing costs, conventional loans are your best bet.
Conclusion
In the always-evolving domain of real estate investment and financing, bank statements and conventional loans are two vastly different routes investors can opt for. As of 2024, every investor should be well acquainted with the nuance associated with each of these options to help make the best decision when the time comes. While bank statement loans allow people with varied streams of income to get mortgages, conventional loans allow more stable investors to get more bang for their buck. There is no winner and loser in this comparison, as the choice completely depends on the financial circumstances and profile of every individual.
Amish Munshi can help you make the right decision and work towards it. Our seamless integration of strategy and use of technology provides an edge in the market.
