Bank Statement Mortgage Loans For Self Employed Borrowers

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Bank Statement Mortgage Loans For Self Employed Borrowers

This BLOG On Bank Statement Mortgage Loans For Self Employed Borrowers Was Updated And PUBLISHED On August 6th, 2019

Bank Statement Mortgage Loans
Gustan Cho Associates
When stated income mortgage loans were popular before the real estate and credit crash of 2008, self-employed folks did not have a problem with financing.
  • As long as they had 20% down payment and just stated their incomes, mortgage applicants were guaranteed mortgage loans
  • Qualifying for mortgage loans for self-employed borrowers was extremely difficult until recently
  • Bank Statement Mortgage Loans for self-employed borrowers, especially those individuals who are taking advantage of writing off as much business expenses found it next to impossible to qualify for home loans
  • With the introduction of NON-QM Loans and Bank Statement Mortgage Loans For Self Employed Borrowers, homebuyers who are self-employed can qualify for  home loans

In this article, we will cover and discuss Bank Statement Mortgage Loans For Self Employed Borrowers.

Issues Faced With Self Employed Home Buyers

What problems encountered by self-employed home buyers

Homebuyers who are self-employed always had the most difficult time in obtaining mortgage loans.  Self-employment comes with many benefits and being self-employed is the American dream.
Having your own business has many advantages such as:
  • Being your own boss
  • Working flexible hours
  • Unlimited income potential
  • Writing off expenses on income taxes as well as depreciating assets, equipment, and properties

Obstacles In Qualifying For Mortgage With Self-Employed Borrowers

What Obstacles to qualifying for a mortgage for self-employed borrowers

However, when it comes to getting mortgage loans for self-employed borrowers, these borrowers go through many obstacles and stress due to being self-employed;

  • A large percentage of self-employed people have been hurt by the Great Recession of 2008 and took thousands of dollars in losses
  • While millions of self-employed people and businesses went bankrupt or closed their door, other fortunate self-employed people and businesses barely survived:
    • Some taking losses year after year

For those that took major losses but survived the Great Recession of 2008, they really do not show too much income on their corporate and personal income tax returns.

Income Calculation Of Self-Employed Borrowers

Income Calculation Of Self-Employed Borrowers

When self-employed people apply for mortgage loans for self-employed individuals either to purchase a new home or to refinance their existing home, they run into major hurdles:
  • This is because the only way they prove their income is via income tax returns
  • Mortgage underwriters will take the average of two years income tax returns as their average income for calculating the debt to income ratio

Here is how mortgage underwriters calculate income from tax returns:

  • If the self-employed borrower had same or increasing adjusted gross income for the past two years, the underwriter will average the two years tax returns
    • The monthly gross income will be the average of the 24 months
  • If the self-employed borrower had declining income on the most recent tax returns, then the income from the two years of tax returns will not be averaged:
    • The most recent year reduced income from the tax return will be used
  • If  borrower showed a loss of $100,000 in 2008 and a profit of $120,000 for 2009, the income will be $20,000 to qualify for the mortgage
  • One of the many advantages of being a self-employed person is that they can write off many things like gas, food, entertainment, clothing, vehicle mileage, among other things to offset their income tax liabilities
    • Self-employed folks do not pay as much income taxes
  • This is great because you get to keep more money in your pocket
  • But it is damaging when it comes to providing proof of sufficient income when it comes time to get a mortgage approval

Many times we can add back depreciation to income if they own another real estate as well as other write-offs:

Adding Co-Borrowers Due To Lack Of Qualified Income

Adding Co-Borrowers Due To Lack Of Qualified Income

Sometimes I can structure a mortgage loan for a self-employed client by adding a co-borrower or to the mortgage loan application:

  • If the self-employed borrower has bad credit, then I can probably just put the self-employed person’s spouse on the loan and add the self-employed person to the title
  • There are many creative ways I can structure a self-employed person to obtain a mortgage loan

Who Can Benefit From Bank Statement Mortgage Loans?

Who Can Benefit From Bank Statement Mortgage Loans?

Self-employed borrowers who do not have a steady income stream and with irregular income are borrowers who can most benefit from our bank statement mortgage loans. A large percentage of our clients at Gustan Cho Associates are self-employed borrowers who benefit with our Bank Statement Mortgage Loan Program.

Here is the ideal borrower for Bank Statement Mortgage Loans:

  • Borrowers who are self-employed
  • Borrowers who only earn seasonal income
  • Borrowers who are consultants and/or promoters
  • Tax-Preparer, Accountant, CPA
  • Freelancers
  • Artists
  • Self Employed Borrowers who do not have a steady income stream or consistent regular income

How Does Bank Statement Mortgage Loans Work?

How Does Bank Statement Mortgage Loans Work?

In lieu of two years tax returns, W-2s, paycheck stubs, and other documents required to process the loan, the underwriting requirements are 12 months bank statements:

  • With bank statement mortgage loans is primarily based on bank statements and a Profit and Loss Statement of the borrower’s business
  • Income tax returns are not required

There Are Three Different Types Of Bank Statement Mortgage Loan Programs

There Are Three Different Types Of Bank Statement Mortgage Loan Programs

Type # 1: Personal And Business Combined Bank Statements

  • Provide the most recent 12 months bank statements
  • The underwriter can request up to 24 months of bank statements
  • The borrower needs to provide a Profit And Loss Statement prepared by their accountant and/or CPA
  • The underwriter will carefully review the expenses stated on the Profit and Loss
  • The underwriter will review and compare it to the type of business borrower is in
  • The Mortgage Underwriter will cross check the P and L to the bank statements provided
  • That will be the determinant of the revenue
  • Deposits from the bank statements need to be not less 5% of the revenue from the Profit and Loss Statements

Using Personal Bank Statements Versus Business Statements 

Using Personal Bank Statements Versus Business Statements 

Type # 2: Using Personal Bank Statements And NOT Business Bank Statements

  • Profit And Loss Statement is not required
  • The underwriter will only go through personal bank statements
  • Need to provide the most recent 12 months bank statements
  • The underwriter may request up to 24 months bank statements
  • Although business bank statements will not be used to credit/income qualify, three months of bank statements are required to determine the maintenance of separate bank accounts

Month income is determined by averaging the annual deposits of bank statements.

Using Business Versus Personal Bank Statements

Using Business Versus Personal Bank Statements

Type # 3:  Using Business Bank Statements And NOT Personal Bank Statements

  • The borrower needs to provide the most recent 12 months business bank statements and not personal bank statements
  • A Profit and Loss Statement prepared by a CPA or Accountant need to be provided

Deposits from the bank statements need to be not less 5% of the revenue from the Profit and Loss Statements.

Overdrafts On Bank Statements

Overdrafts On Bank Statements

Overdrafts on bank statements are frowned upon and can disqualify borrowers from the Bank Statement Mortgage Loan Program.

  • It is up to underwriter discretion to determine whether or not overdrafts will be allowed
  • No more than 3 NSF/Overdrafts are permitted

Every case of overdrafts on bank statements will be viewed on a case-by-case scenario by the underwriter and the underwriting manager has the final say.

Qualifying For Bank Statement Mortgage Loans

How Qualifying For Bank Statement Mortgage Loans

Self Employed Borrowers who do not qualify for traditional government and conventional loans can now qualify with our bank statement mortgage loan program with Gustan Cho Associates at Loan Cabin Inc. Home Buyers who need to get qualified and get a pre-approval for a home purchase or homeowners who need to refinance their homes, please contact us at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

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