Many self-employed borrowers claim that qualifying for a home loan is really challenging due to their numerous tax write-offs. When you’re self-employed you tend to deduct as many business expenses as you can so you keep more income and pay less taxes to the IRS.
That is a great advantage of being self-employed but those write-offs may become an issue when you’re seeking a mortgage on a home purchase or refinance. Thanks to the bank statement mortgage program, self-employed applicants have a method to finance a home.
Who is Eligible?
To qualify for the bank statement loan program, the borrower, or one of the borrowers, must be self-employed or the owner of the business. For the purposes of the lender, a self-employed borrower is one who:
– earns 25% or more of their primary income from a business
– obtains their primary income from commissions, consultant fees, capital gains, or rental income from real estate
Bank Statement Loan Program Success Story
One of the unpleasant truths in the mortgage industry for self-employed home buyers is it can be tougher to qualify for a traditional home loan. The reason is mainly due to a lot of write-offs on their taxes.
With the rules created by the Consumer Financial Protection Bureau require borrowers meet the ability-to-repay (ATR) rule it can be very challenging. Borrowers with significant business expenses on their schedule C or corporate returns trying to get a home loan sometimes encounter debt to income ratio issues.
The solution is the bank statement program which permits lenders to make home loans that don’t have to follow the ability-to-repay rule. This loan option can be perfect for people who earn are independent contractors, seasonal workers, or are business owners.
For these loan applicants, their 1040s are far from being typical tax returns. Yet, these potential borrowers are many times more qualified than a standard W2 wage earner.
Carl was a good example of a borrower for who this loan worked out well.
His business was in the online retailer industry and it was very successful. But not according to his tax returns.
Carl made a great deal of income every month, but as a result of deducting a substantial sum of money for business expenses, traditional lending is not a possibility. He would not have enough earned income to qualify.
Because of the “bank statement” program, financing was still obtainable.
The bank statement program does not need tax returns. In fact, if any tax forms are provided such as 1099s, the loan is disqualified. So, you can still deduct those business expenses and get a mortgage.
How Does The Bank Statement Loan Program Work?
Let’s look at Carl’s monthly bank deposits during the last 12 months. We find out they are adequate to qualify for the bank statement loan. Sometimes 24 months of statements can be used if one year was more than the other year.
The bank statement program using your personal account simply averages the work related bank deposits from the past 12 to 24 months to reach a monthly income. For example
In this example of six months, the income is $6,641 per month. Once the underwriter reviews a full twelve or twenty-four months, they will determine their monthly income.
The second program works with the borrower providing business bank statements for the past 12 to 24 months. This program also requires a letter from a CPA or enrolled tax agent to specify your actual business expenses.
Let’s say the business had verifiable annual deposits of $150,000. The CPA will need to provide an expense letter and/or profit & loss statement that will not be audited. With Carl’s online business, the CPA claims the expenses are 15-percent of gross deposits or $22,500.
In this example, the business income is $10,625 per month.
$150,000 – $22,500 =$127,500.
$1275,500/12 = $10,625/month.
It is worth mentioning that the interest rate is higher than a traditional documented mortgage loan with tax returns.
How much higher? Borrowers can expect an interest rate to be 1- to -1.5-percent higher for someone with excellent credit scores and 2-3-percent for borrowers with scores below 680.
Did you know that 10% down bank statement loans in California are available for purchase and refinance transactions for those with very good credit scores of 740 or higher and 6 months of reserves.