In this upcoming series of blog posts we will discuss unusual and exotic loan programs that might not be for everyone, but will help some people who wouldn’t otherwise qualify for a loan. Today, we will talk about Bank Statement Programs and explain:
- Why these programs exist
- How they work
- How you qualify
- What they cost
- When they make sense
Hey Gabe, I’ve got a problem. See I own this (landscaping, painting, accounting firm, real estate etc) company and I swear I make lots of money, but, you know, my tax situation- it’s complicated. How much money do I have to tell the IRS I made this year to buy a house? How long do I have to wait to buy a house? Should I amend my returns? I really, really really want to buy this house, but I’m being told I don’t qualify.
All this, because of ….
As a side note- can you imagine paying a 95% marginal tax rate like the Beatles Sung about? Yikes? I can’t imagine bothering to get out of bed in the morning and do anything if someone took 95% of my productivity. Rock Stars of the world UNITE! Don’t forget about the oppressed Movie Stars and Professional Athletes! Crazy time I guess, the 1960’s.
Look- I get it. Nobody wants to pay the IRS a dime more than they are legally required to pay them. Having owned my own company for a lot of my life I really really empathize. But, as a lender, we need to see income. The easiest way to look at income is a salary. Next, beyond that, would be an hourly rate. By the time you get into self employed and commission type deals it’s hard to tell how much money is being made. So, we use tax returns. And, as a general rule, we figure that the number that ought to be used is the same number that you told the IRS you made.
Uh Oh, does this mean I won’t be able to buy the house of my dreams? Or any house period? Fear not. We have something that might help. The Bank statement loan!
How Does A Bank Statement Program Work?
A bank statement program exists as an option for a self employed borrower who does not have the tax documents to prove that they have the ability to pay. Instead of looking at the amount of money that the buyer has told the IRS that they make in their business we look at the amount of money that comes into the bank account and impute an income based upon the cash flow for either the persons account or their business account.
There are 3 different bank statement programs:
12 months of personal bank statements: If we use this program then the borrower needs only have a 600 credit score. All of the money that flows into the personal account that comes from a reputable source is used and considered as income. So- if you get money sent to you from one place, over and over again, we add up all that money into your account over a 12 month period and divide by 12 to come up with the answer of how much money that you make per month for income qualifying purposes. All deposits from the same source are used- with no money written off.
12 month business bank statements: This is for the borrower that wants to use their business bank account to qualify for income purposes. We look at 12 months worth of business bank statements and add up all the deposits. We then divide by 2, as you may only use 50% of the deposits, while ignoring all outgoing money. So, essentially you get to count 1/2 of all deposits into your company for the last 12 months. Borrowers must have a 660 credit score to utilize this program.
24 month business bank statements: Same as the above only we add all deposits for the last 24 months, and then divide by 2 to figure the total amount, and divide by 24 to figure the monthly amount. As there is a longer track record on this program we require merely a 600 credit score.
How Do I Qualify For A Bank Statement Program?
- You must be self employed in the same industry for a minimum of 24 months
- You must have a credit score of 600 for the 12 month personal and 24 month business statements, you must have a 660 credit score for the 12 month business statement
- You must have a substantial down payment. With good credit scores you can have a 10% down payment. The closer you get to minimum credit scores the higher percentage you have to put down.
- You must be able to afford to make the house payment and pay the rest of your debts. Typically this means somewhere between 40 and 50% debt to income ratios. But remember, your income is now likely higher when calculating your debt to income ratio.
- This can be a primary home, a secondary home, or an investment property home.
Is This Going To Be Really Expensive?
No, not really? Maybe? Certainly not when compared to paying the IRS way more money than you otherwise might have to in order to qualify for a loan. Depending upon your credit scores a bank statement loan might have a rate as low as 5.25 or so. That’s really not that much above market rates! Also, there is zero mortgage insurance, so that’s a huge help if you are putting down less than 20% on your down payment, as mortgage insurance on a 90% loan can run as high as a couple percentage points.
What I can pretty much guarantee is this- most people who need to use a bank statement loan need to do so because they are maximizing all of their business expenses when dealing with the IRS. It is much cheaper to pay a point or two more in interest on your house (which, remember, has a tax deduction with it, than it is to pay high marginal tax rates to Uncle Sam).
When Would This Deal Make Sense For Me?
This deal makes sense for anyone who wants to buy a house now, and doesn’t want to forgo legitimately making their tax liability as small as possible. Anyone who has 2 years, self employed, immediately gets to go out and buy a house. The max loan on this is something like $3,000,000.00 so it’s for high net worth people as well as people in a more regular income bracket. Self employed people can be the hardest people to qualify for a loan, with a bank statement loan that doesn’t have to be the case anymore
If you or anyone you know is trying to buy a house and they are self employed I’d love to help. Call me at 832-557-1095 or email me at firstname.lastname@example.org and we will see if this very important tool in our tool box can take you from on the sidelines looking to buy into home ownership. As always, everything in mortgage is very detail specific and this is meant as a general guideline for how the process works. Your needs are your needs and unique, much like this program, and I’m here to help!