With the new Dodd-Frank rules, it has impacted hundreds of thousands of legitimate self-employed borrowers from getting a residential home loan. It has for the most part taken away stated income loans on primary residences, although portfolio lenders do still have it available only to California borrowers who can provide substantial liquid assets.
As a result, a different loan program has arisen to take its place when borrowers do not want to submit their tax returns. It is called the 12-month Bank Statement program whereby the lender will review all your deposits and determine your income based on verifiable work related deposits.
Here’s where it gets tricky and where borrowers make mistakes.
1. If you give the lender your business bank statements and your monthly deposit amounts fluctuate significantly, they will request an additional 12 months, so, 24 altogether. It may just be part of your profession, so the underwriter has to establish this fact over a 24-month period.
If on the other hand, your monthly deposit amounts are consistently the same each month, then the additional 12 months will not be needed. So, while it is a 12-month program, the underwriter does have the discretion to request another years worth of statements.
2. Deposits that are wired into the account and are not sourced. Usually this means there is no description on the transaction within the statement and the borrower has failed to provide one. The lender will not count that as income unless you have documented proof that it is from your work.
3. Making a deposit from a refinance, loan proceeds or the sale of another large asset (real estate, car, boat), or winnings from gambling, lottery, lawsuit settlement, etc. Those funds cannot be used as income.
4. Making deposits from friends or relatives and attempting to use as income
5. Bank transfer deposits from a different account (personal or second business account) cannot be considered self-employed income unless it is sourced.
In conclusion, any deposits you make should be sourced and documented as work related income to be allowed by the lender. Otherwise, you will be disappointed that your anticipated is a lot lower than you expected and maybe not qualify.