In some situations, it can be difficult to take out a mortgage for certain reasons. For example, if you are self-employed or do temporary or freelance work, you would lack the necessary documents to apply for a conventional home loan. The same goes if you are an independent contractor who works on an on-demand or informal basis.
Luckily, there is a solution that can help in such cases—the bank statement loan.
Here, we will take you through all you need to know about how to qualify for a bank statement loan, so you can get yourself on the home-buying-process ladder without any hassle. We will also give you some extra tips on how to still make a profit when you sell your purchased property with an existing mortgage.
What Is a Bank Statement Loan?
A bank statement loan is a type of mortgage that allows you to use your own financial history to qualify for a home loan. Also referred to as “low doc loans”, it only requires borrowers to provide their most recent personal or business banking statements when applying for a mortgage. These documents help lenders determine how much income you have coming in each month and whether you are capable of paying off your debt over time.
The idea behind this type of loan is that, instead of relying solely on tax returns and other income documentation (which can be difficult to provide if you are self-employed or have an irregular income), lenders turn to bank statements as a way to determine your ability to make the regular payments on the loan.
Moreover, since bank statement loans are tailored to those with lower-than-average incomes, they can also be a great option if you have a higher debt-to-income (DTI) ratio than the traditional mortgage criteria.
How Does a Bank Statement Loan Work?
When you are approved for bank statement loan programs, you will be provided with a unique loan amount. Each month, your lender will take the average balance of your bank statements over the past few months and use that to determine how much money they are willing to lend you. The exact amount will depend on how much DTI ratio you have and what other factors lenders look at when determining whether or not to approve a mortgage application.
But if you have a higher DTI ratio, you might still be able to qualify for a loan if you make a larger down payment. In some cases, lenders may also look at other factors, such as your credit score or how much money you have saved in the bank.
Bank Statement Loan Requirements
The requirements for a bank statement loan application will vary from one lender to another. But generally speaking, you will not be required to provide employment verification forms, which conventional home loans typically require. Instead, you will be asked to provide your personal or business bank statements for lender verification.
Here are the usual bank statement loan requirements that you need to meet in order to qualify.
1. Bank Statements for the Past 1 to 2 Years
You need to have your bank statements on hand to show the lender your average balance over a certain period of time. This usually works best if the period of time is at least six months or longer.
Loan officers need these pieces of documentation to verify your cash flow and savings. When you are consistent in these aspects, it gives lenders more confidence to approve your loan application.
2. History of Self-Employment of 1 to 2 Years
Apart from two years’ worth of recent bank statements, you will also need to provide proof of your self-employment for the past two years. This is especially important if you are a freelancer who offers your services on an on-demand basis.
So, you might want to prepare documents, such as recent invoices, business activity reports, and other income-related paperwork.
3. Minimum Credit Score Requirements
Although bank statement loans do not require you to have an established credit history, it is still important to understand that lenders will take into consideration your credit score when deciding whether to approve or reject a loan application.
Generally, most bank statement loan lenders require applicants to have a high credit score, typically 680, before they can proceed with the loan process. However, some might also be less strict and accept applicants with slightly lower credit scores, down to 620.
4. Low DTI Ratio
Again, your DTI ratio is a key factor in determining whether you are eligible for a loan. It measures your overall financial health and provides lenders with an idea of how much money you can actually afford to put toward your loan payments each month.
A good DTI ratio should not exceed 43%. Anything more than that will make it difficult for you to get approved for a loan, so make sure that you keep yours in check.
5. Proof of Liquid Assets and Other Funds
When you apply for a loan, lenders often want to see proof of your liquid assets and other funds available to put toward the purchase. So, make sure that you have this ready when submitting your application.
For example, if you have a savings account or any marketable securities, you should prepare the necessary documents that prove you have these resources to make your loan application process a lot faster.
Apart from these five general requirements, you might also need to make a larger down payment to get approved for a bank statement loan. This is because lenders are more likely to lend you money if they see that you have the financial capabilities to pay them back in full.
How to Increase Your Chances of Getting Approved for a Bank Statement Loan
Remember, there is no 100% guarantee that you will be approved for a bank statement loan. But there are ways that you can increase your chances.
Improve Your Credit Score
Having a good credit score can make all the difference when it comes to loan approval. So, if you have a low credit score and are looking to apply for a bank statement loan, your best bet is to improve it before submitting your application. And, if you find errors in your credit report, make sure to correct them as soon as possible.
Remember—having a high credit score not only ensures your application will be approved, but it also gives lenders more confidence to offer you lower bank statement loan rates!
Pay Off Your Existing Debts
If you have any existing debts, such as credit card debts or car loans, it is important to pay them off before you apply for a bank statement loan. Doing so proves that you are financially responsible and can make the difference between your application being approved or rejected.
Emphasize That You Are Willing to Make a Larger Down Payment
When you make a larger down payment, it shows lenders that you are willing to invest more money into the purchase and have a vested interest in the property. A larger down payment also reduces your monthly payments.
Seek the Help of a Reputable Mortgage Broker
Perhaps, the best way to increase your chances of getting an approved bank statement loan is to seek the help of a reputable mortgage broker. A good broker will review your financial situation and suggest the best options for you, as well as provide advice on how to make yourself more attractive to lenders. They will be there for you every step of the way and can make the entire process much smoother.
When you know how to qualify for a bank statement loan, you can make the process a lot easier and increase your chances of getting approved. Just make sure that you meet the requirements, have all your documents ready, and look for a reputable broker to help guide you in the right direction.
Buying and Selling a Home: How to Make Profit with an Existing Mortgage
If you are wondering if it is possible to make a profit from buying and selling a home with an existing mortgage, then the answer is, “Yes!”
When you purchase a property with an existing mortgage, it gives you the ability to leverage your funds so that you can buy more than one property. This way, you can spread out your risk across multiple properties and increase your overall return on investment (ROI).
Plus, when you resell the property, all of the costs associated with the loan are usually passed onto the buyer. This means that not only will you make money from the sale price but also from additional savings due to reduced closing costs.
However, you should still be careful when considering investing in an existing mortgage. Here are the steps that you should take.
1. Find out the remaining loan balance.
Before you sell a property with an existing mortgage, you must first find out the remaining loan balance. This will tell you how much of the mortgage debt is still left to pay off. Be sure that you take into account the interest rate and any other fees associated with the loan.
2. Make some necessary repairs.
Ensuring that your home appeals to most buyers is key to getting the best price for it. Making any necessary repairs and updates to the property will help make it more presentable and attractive, thus increasing its chances of selling at a higher price.
3. List the house at a good price.
Setting a good list price for a home requires some research. You should look at the prices of similar homes in the area and use that data to determine what a fair offer would be. It is important to not price your home too high, as this could cause buyers to have an unfavorable view of it or overlook it entirely.
4. Sell at the right time.
When it comes to selling a home with an existing mortgage, timing is everything. You should try to take advantage of a strong housing market and make sure that the house is listed during peak season (i.e., spring or summer). This will help you get the most out of your investment.
5. Take into account the closing costs that you might need to pay.
You might be responsible for paying some closing costs. These include things like title insurance, transfer taxes, and any other fees associated with the sale of the house.
You should factor these into your calculation of profit before listing the property for sale.
6. Consider selling to a company that specializes in buying houses fast.
If you want to sell your house fast, then you can work with companies, such as Rocket Homebuyers. You will be able to receive quick home sale services here that are tailored to your needs and involve no hassle or stress. More often than not, there will be no commissions, no agent fees, and no closing costs. This will give you more money in your pocket when selling the house.
Understanding Negative Equity
When selling a house with an existing mortgage, there is one thing that you need to pay close attention to—negative equity.
This situation occurs when the value of a home decreases, yet the balance on the loan remains the same or increases. This can potentially cause financial hardship if it is not managed properly.
In order to avoid this, you should make sure to calculate your home’s current market value before listing it for sale. That way, you will have an accurate estimate of how much money you will be able to get from selling it and avoid any losses due to negative equity.
So, there you have it! Now that you know how to qualify for a bank statement loan, it is time to do some assessments and get started on your journey to a successful investment.
Remember that every individual’s situation is unique, so it is important to consider your needs and goals when making financial decisions. With a bit of research and planning, you can make the most out of your home-buying experience.
For more tips and information on real estate investing, feel free to check out our other posts at My Architecture’s Idea.