Lenders require documentation that proves your income history and status as a reliable borrower when you apply for a mortgage. Most lenders require tax returns and other financial documents to qualify for its mortgage products. For some borrowers, this isn’t the most accurate representation of their financial situation. If this sounds like you, there may be another option — the bank statement mortgage loan. Lenders are looking at your financial situation, and the tips below explain what they’re looking for and what you can do to improve your chances of approval.
What Are Lenders Looking for in Your Bank Statements?
When you share your bank statements with lenders, they are looking for a full picture of your finances. Sure, you might get that expensive cup of coffee every morning, but the lender can also see:
Consistent Income
When lenders look over your bank statements, they can see your income, when it comes in, how much it is and get an idea of what your debt-to-income ratio is.
Your Expenses
The lender also sees your expenses, giving them an idea of what would happen to your finances if you were paying them a mortgage note every month.
How Much Space You Have for a Mortgage
Chances are, you’re paying a mortgage note or rent at this time, meaning that the lender can compare what you can afford to those payments, gaining a better understanding of your debt-to-income.
What Do Lenders Don't Want to See in Your Bank Statements?
While there are several factors that lenders look for in bank statements to determine your eligibility and reliability, there are certain elements that lenders do not want to see. These red flags can potentially hinder your chances of securing a loan or obtaining favorable terms.
Large Cash Deposits
Mortgage lenders want to see a consistent paper trail of the funds being used for a down payment and closing costs. Large cash deposits can be seen as suspicious and may raise questions about the source of the funds.
Negative Balances or Overdrafts
Lenders want to see that you have good financial management skills and can consistently maintain positive balances in their accounts.
Excessive Withdrawals or Transfers
Regular and excessive withdrawals or transfers from the bank account can raise concerns about your ability to manage your finances and make timely mortgage payments. Lenders want to ensure that you have enough funds available to cover their mortgage payments each month.
What is a Bank Statement Loan?
Bank statement loans are mortgage loan programs that are offered to help some borrowers qualify for a mortgage. Most mortgage types require your tax returns to evaluate your income and ability to repay a mortgage. Bank statement loans are unique in that lenders instead use your bank statements to evaluate your income. This is a valuable option for many borrowers, especially if you are a freelancer, entrepreneur or small business owner.
Bank statement mortgages loans may come with many advantages, including:
- A higher maximum debt-to-income ratio of 50%. Your debt-to-income ratio is the number of debt payments you make each month compared to your gross monthly income. You can calculate your debt-to-income ratio by dividing all of your monthly debt payments by your gross monthly income.
- Acceptance of credit scores as low as 500 in some cases
- Ability to borrow up to 90% of your home’s value
- No private mortgage insurance (PMI) requirements
- Ability to finance primary residences, second homes and investment properties
- Less paperwork required, including no need to provide your tax returns
Since your bank statement is evaluated more heavily for the bank statement mortgage loan program, it’s important to understand what your bank statement shows and represents.
A bank statement is a document that is issued each month summarizing each bank account. Your statement includes:
- The cash balance of your account at the beginning of the statement period
- The total amount of checks and cash deposited into your account during the statement period
- Transactions that withdrew money from your account during the statement period; this may include automatic payments to pay recurring bills, cash withdrawn from an ATM or from the bank branch and purchases made with your debit card
- Interest earned on your account, if applicable
- Service fees or penalties that may have been charged against your account, for example, penalties for withdrawing more money than you have available in your account
- The cash balance of your account at the end of the statement period
You can also request bank statements for custom periods of time from your bank. For instance, you can request a statement that will detail an entire year’s worth of your bank account history.
Bank Statement Loan Requirements
To qualify for a bank statement mortgage loan, you must meet a number of requirements. Many of these requirements are the same or similar to requirements for other mortgage loan types.
Good credit
As with any loan product, lenders look at your credit report and credit score to determine your reliability as a borrower. Your credit report includes several details, including your credit account history and credit inquiries on your account. It ]also shows how much credit you have available, how much debt you owe and whether you have a history of making your payments on time.
Your credit score affects a few factors, such as whether a lender can approve you and what interest rate they can offer you. Some lenders accept credit scores as low as 500 for bank statement mortgage loans. Other lenders may require credit scores as high as 620. The higher your score is, the better chance you have of getting approved and being offered a lower interest rate on your mortgage loan.
Proof of income
One of the most important factors that a lender considers is whether you have a reliable income to make your mortgage payments each month. Lenders may offer a few different bank statement mortgage loan programs, each of which has different requirements.
For this mortgage loan, you will use bank statements to provide your proof of income. Lenders may accept either personal or business statements for these programs. Some may accept both personal and business statements.
A few common program options offered by lenders are:
- 12-month bank statement: For these loans, you would be required to provide statements for your bank accounts that show the account history for the last 12 months.
- 24-month bank statement: This option requires bank statements that show account history for the last 24 months.
- 1-month bank statement: This option is less common, but some lenders may offer it. In these cases, you would only need to submit bank statements for the last month.
Your Assets
Lenders will also want to see the documentation of any assets you have to your name. This can include savings and retirement accounts.
Identification
You will need to provide basic information, such as your driver’s license and Social Security card to prove your identity.
Business Documents
If you own a business, you may need to provide a copy of your business license or permit.
Insurance
If you already have home insurance, lenders may want to see this.
Why Get a Bank Statement Mortgage Loan?
If you have a nontraditional source of income, bank statement mortgage loan programs may be beneficial to you. Most mortgage types require tax returns as an essential part of its application process. This type of mortgage loan allows you to show your proof of income in other ways. If you’re self-employed or a business owner, this may make the difference between qualifying and not qualifying for a mortgage.
If this sounds like your situation and you haven’t been able to secure a mortgage yet, contact one of these reputable bank statement mortgage loan lenders for a great next step.
Frequently Asked Questions
Do mortgage lenders go through bank statements?
Yes, mortgage lenders typically go through bank statements during the loan application process. This helps them verify the borrower’s income, expenses, and overall financial stability.
Should real estate agents check your bank statements?
Traditional home buyers share their financials with their mortgage lenders to gain pre-approval. However, real estate agents may want to review a client’s financials, bank statements, etc. to determine if they can afford the expensive homes they’re showing.
Are bank statement loans a good idea?
Bank statement loans are a good idea because they make it easier for the self-employed and business owners to obtain mortgages?
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