Given the right situation, there is an appropriate fit for each loan program we offer. And for some small businesses or sole-proprietors, that solution may be our Bank Statement loans.
Traditional underwriting guidelines require a 2-year history of self-employment, which means, at a minimum, providing 2 years of federal tax returns plus a year-to-date Profit & Loss statement. For employees, recent pay stubs and W2 forms are required in addition to the tax returns, to determine after-tax income.
None of this documentation is required with Bank Statement loans! Instead, the underwriter will simply look at total gross deposits made to the applicant’s business or personal bank account (ignoring the withdraws and expenses) and apply a discount rate (usually 50%), to arrive at your total monthly income. We can allow this for purchase, refinance or cash-out transactions.
Here is a real-life example to help illustrate how powerful this program can be. Using the conventional 24-month average, one client would have had qualifying income of $4166/month, based on their Schedule C (sole-proprietor) income, net of business deductions. Instead however, we used a Bank Statement loan that yielded a whopping $16,335/month – simply based on deposits made to the business account. This results in at least an EXTRA $700,000 in loan amount!!!
But wait… this sounds too good to be true, right? As with any loan, the lender assumes a certain amount of risk in exchange for the price for borrowing money, or the interest rate. That rate moves slightly higher for these lower-documentation loans, but to protect consumers, the loans are still governed by the Ability to Repay Rule of 2014 (aka the Dodd-Frank Act). This law requires mortgage lenders and brokers to use a reasonable and good faith effort to determine if the applicant can repay the loan, which includes considering eight different underwriting factors. At the end of the day, more programs and options are generally better for the consumer because it spurs economic growth for businesses and individuals.