Mortgage Loans For Self-Employed Borrowers
Roughly 10 million Americans are self-employed, including freelancers and contract workers, according to a 2022 data set from the U.S. Bureau of Labor Statistics. So it’s no surprise that there are special mortgage programs to help self-employed people buy a home or refinance their current home.
How do bank statement loans work?
Bank statement loans are a popular option. These don’t require W2s or previous years’ tax returns. Instead, underwriters verify your monthly income by looking at deposits on your recent bank statements. You’ll typically need to provide the past 12-24 months of bank statements along with other supporting documentation.
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There are special mortgage programs to help self-employed people buy a home or refinance their current home
Pros of bank statement loans
Many business owners, contract workers, and others in the gig economy minimize their tax liabilities by maximizing their deductibles for business expenses. Unfortunately, these write-offs can make your income look much smaller than it really is on tax documents. When it comes to qualifying for a mortgage, that means you could end up with a lower loan amount due to your ‘smaller’ income.
For example:
- $100,000 gross income
- $60,000 in claimed expenses on tax returns
- $40,000 taxable income: The only portion usable for mortgage qualifying
Some self-employed mortgage borrowers use bank statement loans to get around this obstacle by counting most or all their income while ignoring expenses.
Bank statement loans come in several flavors. We found bank statement loan lenders offering:
- 30-year fixed-rate mortgages
- 5/1 adjustable-rate mortgages (ARMs)
- 7/1 and 10/1 ARMs
- Jumbo loans with loan limits in the millions
As an added benefit, many bank statement loans require no mortgage insurance. Since non-QM loans can’t be sold to Fannie Mae or Freddie Mac, lenders aren’t required to charge the (borrower-paid) private mortgage insurance that so many home buyers try to avoid.
Cons of bank statement loans
The biggest downside to a bank statement loan is that you’ll typically pay a higher interest rate than you would with a standard conforming mortgage.
- Higher interest rates: Interest rates are typically higher on these mortgages. So you should expect to have to shop around even more than usual for a good deal
- Unregulated loans: Non-QM loans aren’t regulated like other mortgage programs. That means each lender sets its own criteria or “underwriting standards” for approving these loans
Don’t be put off if you’re turned down by one or more lenders. Keep looking, and you may well find one that’s eager to help you. Some experts recommend that you find at least five self-employed mortgage lenders for your shortlist and then compare their offers side by side.
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Many business owners, contract workers, and others in the gig economy minimize their tax liabilities by maximizing their deductibles for business expenses
What is a non-qualified mortgage?
Bank statement loans are a type of “non-qualified mortgage” or “non-QM loan.” Non-QM means a loan doesn’t meet the conforming mortgage standards set by Fannie Mae and Freddie Mac. Since bank statement loans do not use traditional income verification, they fall into this category.
Non-qualified mortgages are less regulated than most other mortgage loan programs. So you won’t get some of the consumer protections that apply to other loan types. That means you need to make sure the lender you choose is reputable and that you fully understand the mortgage agreement you sign.
In addition, Non-QM loans have higher interest rates than conforming mortgage loans. That means self-employed borrowers using bank statement loans will typically pay more interest than self-employed borrowers using a conventional mortgage or government-backed loan.
If you’re in any doubt over any issue, keep looking or seek professional advice. Remember, a home loan agreement is not binding until you sign the final closing papers. So if anything seems amiss at any point in the mortgage process, you can always walk away.
Do you need a bank statement mortgage?
As a self-employed borrower, you’re not required to use a bank statement mortgage. You have the option to apply for mainstream loan programs just like everyone else, including conventional, FHA, VA, and USDA loans.
These major loan programs can be easier to qualify for and typically offer lower rates than non-QM mortgages. However, you’ll have to verify income using tax returns rather than bank statements. This could reduce your qualifying income since you have to use your after-expenses income for the year.
Think about your home buying or refinancing goals: Do you want the lowest rate? The biggest loan amount? The cheapest monthly payment? Knowing your goals will help you compare options and find the best loan program for you.
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As a self-employed borrower, you’re not required to use a bank statement mortgage. You have the option to apply for mainstream loan programs just like everyone else
Bottom Line
Bank statement loan rates are higher than traditional mortgage rates because non-QM loans are considered a bigger risk.
Every lender assesses risk in its own way. So it’s hard to come up with a helpful average for how much higher bank statement rates really are. But when we sampled a few bank statement loans on the day this was written, we found a number quoting rates of around 6.62% to 8.25% for a 30-year fixed-rate mortgage (FRM). By comparison, Freddie Mac’s average rate was 5.89% for mainstream 30-year FRMs on that same day. Come bank statement mortgage rates were nearly 3% higher.
That’s not to say you can’t find a good deal. But it should underscore the importance of shopping around for your best offer. You might see a wide variety in the rates you’re offered, and you want to be sure you’re getting the most affordable loan you can.
This article was originally published by Peter Warden in www.themortgagereports.com
