You want to purchase a new property for yourself or your investment portfolio. The only problem? You're having difficulty qualifying for a traditional mortgage because of your bank’s strict income documentation requirements.
Luckily, though, you might be able to make your purchase with a bank statement loan. Bank statement loans are a great option for self-employed individuals and business owners, even if you have less than perfect credit or less than 20% for a downpayment.
Today, let’s break down how bank statement loans in Florida work and how you can leverage them to excellent effect.
What Is a Bank Statement Loan?
A bank statement loan is a unique loan agreement that lets you obtain a mortgage without most of the income-related documents needed to secure a traditional mortgage. Also called alternative documentation loans or self-employed mortgages, bank statement loans can be advantageous in a variety of circumstances.
In a nutshell, bank statement loans might be viable if a lender can determine your creditworthiness by looking at your personal information, bank statements, and other documents instead of tax returns, paystubs, or employer verification.
Is a Bank Statement Loan a Conventional Mortgage?
Bank statement loans are not conventional loans. Instead, they are non-QM loan products. Non-QM loans, or non-qualified mortgages, are a type that doesn’t require you to qualify based on the traditional income verification methods used by most loans.
Non-QM loans, such as bank statement loans, come with many benefits compared to conventional, qualified mortgage loans, including flexible documentation and more repayment options. Non-QM loans offer 15 and 30-year loan terms, 5/1 and 7/1 adjustable-rate mortgage (ARM) loans, no PMI (private mortgage insurance) options, and interest only payment options.
How Do Bank Statement Loans Work?
Most mortgage loans require a handful of documents to verify your identity and your source of income. These include your tax returns, W-2s, employer verification forms, pay stubs, and more.
However, bank statement loans don't use any of those. They instead use personal and/or business bank accounts and cash flow statements to prove creditworthiness and that you can pay back a loan in full.
That said, bank statement loan applications may require you to provide more documents in aggregate compared to traditional loan instruments. For instance, you may need to provide:
- A good credit score, which usually ranges anywhere from 620 and up.
- Between 12 and 24 months of personal and/or business bank statements.
- Proof of any additional assets like 401(k) funds or investments.
- Proof of cash or liquid funds to cover your loan (at least several months of your mortgage payments), also known as reserves.
- A business license (if applicable).
- A letter from an accountant or anyone who does your taxes proving business expenses.
If you are approved for a bank statement loan, it works similarly to traditional mortgages. You will need to pay back your loan on time each billing cycle, and the lender will earn money through interest over time.
Valid Property Uses
In Florida, a bank statement loan has many valid uses. Some of these include:
- Primary homes
- Second homes
- Investment properties
However, note that although these uses are widespread and very common, they don’t cover everything. There are, of course, property types that are not permissible for bank statement loans.
Who Qualifies for Bank Statement Loans?
Because of their unique application requirements, bank statement loans have specific requirements you must meet. These include:
- A minimum credit score, usually of 620 or above. The higher the credit score, the better, and you could also qualify for a lower down payment requirement.
- A minimum time in business as a self-employed contractor or business owner, usually two years.
- A minimum down payment, which can vary depending on the price of your desired property.
- A minimum time since any “house events” like a short sale or foreclosure.
- A certain amount of cash reserves in your bank, usually several months’ worth of mortgage payments.
The exact requirements will vary from lender to lender. Be sure to review the terms and conditions for any bank statement loan carefully before signing.
What Are the Advantages of Bank Statement Loans?
As you might expect, bank statement loans have several major advantages that make them attractive instruments for residential real estate investors, small business owners, and more.
These benefits include:
- Lighter documentation requirements
- Use 12 to 24 months of bank statements
- Put as little as 10% down
- Higher loan limits
Below, we’ll discuss each of these benefits in more detail.
Lighter Documentation Requirements
For starters, the chief benefit of a bank statement loan is its lighter documentation requirements. To qualify, you don’t need to have proof of employment by a large organization, nor do you need to provide tax returns.
So long as you have proof of cash flow and plenty of bank statements, you can likely get approved for a bank statement loan for a standard residential or commercial real estate property. In other words, cash is the limiting factor, not your documents.
Use 12 to 24 Months of Bank Statements
In place of documents like tax returns or W-2s, bank statement loans just require 12 to 24 months of bank statements plus a handful of other documents. You can easily retrieve these from your bank or print them out yourself by accessing your bank's records online. This is ideal for people with self-employment income or other nontraditional forms of income.
Put As Little as 10% Down
Some bank statement loans require you to put just 10% down rather than a higher 20% or 30% down payment. This can make certain real estate properties more accessible to borrowers or investors, especially those looking to build up their portfolios from scratch.
Higher Loan Limits
Lastly, many bank statement loans offer relatively high loan limits. These expand your buying power and may let you purchase properties that would otherwise be out of your financial reach.
What Are the Drawbacks of Bank Statement Loans?
However, even though bank statement loans do have several benefits, there are some drawbacks to keep in mind. These disadvantages include:
- Higher interest rates
- Higher down payment if your credit score is low
- Need to be self-employed for two years
- Not offered by all lenders
Higher Interest Rates
For one, bank statement loans frequently charge higher interest rates. After all, the lender or bank in question is taking on extra risk by lending you money without W-2s, tax forms, and other supporting paperwork.
May Require a Higher Down Payment
While some bank statement loans have low down payment requirements, others may have much higher down payment requirements — as high as 35% or more.
Again, this all comes down to the lender in question; some banks are more risk-averse and require higher down payments to offset the higher perceived risk.
Need To Be Self-Employed for Two Years
If you try to take out a bank statement loan as a self-employed individual or contractor, you’ll need two years of self-employed history to qualify for most contracts. This proves that your self-employed business is stable and that the bank can count on you to make your payment every billing cycle.
Not Offered by All Lenders
The last potential downside to bank statement loans is that you can’t find them at every lender. Only some lenders provide bank statement loans at all, and even fewer provide high-quality bank statement loans with accessible terms and low qualification requirements. Therefore, you may need to hunt for some time to find the right bank statement loan for your needs.
Should You Apply for a Bank Statement Loan?
Generally, you should apply for a bank statement loan if:
- You can’t qualify for a traditional mortgage offering. For example, if your credit score is too low or if you are self-employed, you can use a bank statement loan to get around blocks to financing.
- You don’t have traditional employment and are unable to provide W-2s or other proof of consistent employment income.
- You have a “funding gap” and require quick financing to ensure a purchase goes through while your long-term, traditional financing gets approved by a lender.
This last point is important since it means that you can use a bank statement loan in conjunction with a traditional mortgage if you’re trying to acquire property in a fast-moving market like South Florida’s.
How Vaster Can Help
A bank statement loan could be just what you need to secure financing for a residential real estate project or rental purchase. You just need plenty of bank statements, a history of cash flow and self-employment, and a letter from a CPA.
That said, you’ll want to make sure that you take out the right bank statement loan for your budget, your portfolio goals, and your other needs. That’s why you should only rely on high-quality, trusted lending institutions like Vaster.
We initially began as a joint venture between The Related Group and the Fortune International Group: two of the largest real estate firms in South Florida. We’ve been offering speedy financing solutions for Florida investors for years, and have expanded our loan offerings to cater to the needs of homebuyers too.
Contact one of our loan officers today to learn more about bank statement loan options and see how else we can help you.
What Is A Good Credit Score? | Equifax
Certified Public Accountant (CPA) Definition | Investopedia
Down Payment Definition | Investopedia