A bank statement mortgage, also known as a self-employed mortgage or a non-traditional mortgage, is a type of home loan designed for individuals who have non-traditional income documentation or are self-employed. Unlike traditional mortgages that rely on W-2 forms and tax returns to verify income, a bank statement mortgage allows borrowers to provide bank statements as proof of income.
If you are wondering whether you can qualify for a bank statement mortgage, or what your options are to pursue homeownership, we are here to help. Contact us any time!
Wondering what the difference between a bank statement mortgage and a traditional mortgage is? There are a few distinguishing features.
Traditional mortgages work for traditional employees with typical income. In other words, they work well for someone who can verify income with a W-2 and pay stubs. If you are self-employed or a contractor, this might be easier said than done.
Self-employed individuals often face challenges when applying for a traditional mortgage because their income can vary significantly from year to year or may not be easily documented through conventional means. Bank statement mortgages provide a viable solution by allowing these borrowers to use their business or personal bank statements to demonstrate their ability to repay the loan.
Some borrowers have income from sources other than self-employment that may not fit within the framework of a traditional mortgage. This could include rental income, investment income, or royalties. Bank statement mortgages can be a suitable option for these individuals as they allow for a more flexible and holistic approach to income verification.
Self-employed individuals often take advantage of various tax deductions and write-offs to minimize their taxable income. While this can be beneficial from a tax perspective, it may lower the documented income on tax returns, potentially making it more challenging to qualify for a traditional mortgage. A bank statement mortgage takes into account the net income reflected in the bank statements, providing a more accurate representation of the borrower’s ability to repay the loan.
Cash Flow vs. Salary
Bank statement mortgages focus on the cash flow of the borrower, allowing for a more comprehensive evaluation of income and expenses. This flexibility can be advantageous for individuals who have seasonal income, irregular payment schedules, or significant fluctuations in monthly cash flow.
It enables lenders to assess the borrower’s ability to repay the loan based on their actual cash flow rather than relying solely on a fixed income amount. We will look at 12 to 24 months of bank statement to determine your overall income rather than just looking at a recent pay stub or tax return.
Streamlined Application Process
Another difference between bank statement and traditional mortgages is the application process. Compared to traditional mortgages that require extensive documentation, bank statement mortgages often have a simplified application process. Borrowers are not required to provide as many financial documents, such as tax returns, W-2 forms, or pay stubs. This can save time and reduce the administrative burden, making the mortgage process more efficient.
Bank statement loans provide an avenue to homeownership for borrowers who can afford a mortgage but cannot qualify with traditional documentation. However, there are some additional expenses and tasks associated with a bank statement mortgage that you should keep in mind:
- While bank statement mortgages may require fewer traditional income documents, borrowers still need to provide detailed bank statements for the specified period, usually 12 to 24 months. These statements should show consistent deposits and a healthy cash flow to demonstrate the borrower’s ability to repay the loan.
- Due to the perceived higher risk associated with non-traditional income verification, your bank statement mortgage may come with slightly higher interest rates compared to conventional mortgages.
- You may need to pay a larger down payment for a bank statement loan in comparison to a traditional loan.