Bank Statement Home Loans Pros And Cons

Being self-employed has its perks, but it can make it hard to prove you can afford a home mortgage because your tax returns don't always accurately reflect how much you earn in a year. Bank statement home loans are an alternative that uses your account deposits instead of tax returns to verify your income. Here are some pros and cons of using this option to buy property.

Easier to Get Approved for a Loan

There are several alternative mortgage products that verify income in different ways besides using income taxes, but a bank statement home loan is the easiest to complete. The lender reviews your statements for a certain period of time (e.g. 12 months) and calculates your income based on how much money you deposit into the account every month. They then use that number to determine your maximum mortgage loan.

For instance, if you deposit $10,000 per month from your business into your account, that equals $120,000 over 12 months. Based on a 36% mortgage debt-to-income ratio, your monthly payments would come to $3,600, which would qualify you for a $600,000 loan.

Of course, there will still be other requirements you need to meet, such as having a good credit score and a good down payment. However, the most challenging part of qualifying for a home loan for a self-employed person—income verification—will be the easiest to complete. It's best to consult with a lender about what you'll need to get approved for this type of loan before applying.

The Money May Be Expensive

One drawback to a bank statement loan is that you may be charged a higher interest rate than you would receive if you were approved for a traditional mortgage. Lenders place these loans into a high-risk category because they cannot be guaranteed by the government agencies Fannie Mae or Freddy Mac, and the interest rates reflect that.

However, as with traditional loans, there are several ways you can reduce the interest rate on a bank statement loan. Your credit rating will have a big impact on your starting rate. The better your credit, the lower your rate. You can also reduce your rate by paying points or increasing your down payment. Another option is to refinance the loan later when rates drop or you can qualify for a traditional mortgage.

A mortgage lender can work with you to get the rate to something you're comfortable paying. Connect with a bank in your area for more information about bank statement home loans or help submitting an application.