Today, ‘Bank Statement’ loans are replacing what was formerly called Stated Income – two dirty words from the good ‘ol wild west which the Dodd-Frank Act thoroughly abolished in 2010. So then what is new or better about the Bank Statement variety? The justification behind these loans is that income is verified through bank statement deposits made over a certain number of months, rather than paystubs, W2s and/or tax returns. This is a politically and ethically-based step-up from traditional Stated Income where an applicant (not surprisingly) simply ‘stated’, or wrote down, their income. No other income documentation was required.
But there is, in fact, a plausible need for this type of loan application – for example, the employment and income may be difficult, burdensome or unseasoned enough to document. Or, the transaction may involve complex tax issues that the borrower would prefer to avoid having the file analyzed by underwriting. Can applicants still find ‘wiggle room’ to manipulate the system – surely they can, but that is also the case with every other loan program.
These days, most post-crisis loans like these are subject to massive scrutiny to satisfy the Ability-To-Repay rule so lenders struggle to find the balance between serving the non-QM ‘alternative documentation’ target market while steering clear of the ‘liar-loan’ label from years past.
Fortunately for mortgage brokers, we get to ultimately pick which ‘half of the cake slice’ we prefer, having many potential lending doors ajar for each specific scenario. One lender may have a bank statement loan but require a CPA letter whereas another may only require a business license to establish self-employment. Some may require 6-12 months of reserves in savings and allow up to a $5,000,000 loan amount while and some may require zero reserves but require a 650 FICO.
Not only are there a bunch of new programs and nuances that offer different ways to substantiate income (asset depletion, retirement distributions, restricted stock units, just to name a few), but they also have frequently changing guidelines too boring to enumerate in a blog post. At the end of the day, whether a ‘Bank Statement’ loan is right for you definitely require consultation with your favorite mortgage expert.