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What is the difference between Stated Income or Bank Statement Mortgage?

In the past, stated income mortgages worked by allowing the employed borrower to simply state their income without any income verification document needed. Today, we know how risky this could be and how it could lead many to foreclosure due to an inability to pay back the loan. These types of loans needed to be updated. Now, the new and improved stated income mortgage is a type of non qualified mortgage or non-qm loan called a bank statement mortgage in which a self-employed borrower who cannot provide the necessary documents such as tax returns, W-2s and paycheck stubs to prove they have a stable income as with conventional loans, can provide their personal and/or business bank statement to confirm their income. The bank statement can either be from 12 or 24 months prior although 24 months is preferred if you want better interest rates and terms.

What is the difference between Stated Income or Bank Statement Mortgage?

In the past, stated income mortgages worked by allowing the employed borrower to simply state their income without any income verification document needed. Today, we know how risky this could be and how it could lead many to foreclosure due to an inability to pay back the loan. These types of loans needed to be updated. Now, the new and improved stated income mortgage is a type of non qualified mortgage or non-qm loan called a bank statement mortgage in which a self-employed borrower who cannot provide the necessary documents such as tax returns, W-2s and paycheck stubs to prove they have a stable income as with conventional loans, can provide their personal and/or business bank statement to confirm their income. The bank statement can either be from 12 or 24 months prior although 24 months is preferred if you want better interest rates and terms.

Why do other banks say no to Bank Statement Loans?

Because the borrower is not providing income verification in the traditional way, the lender would be taking a risk on the borrower since this type of income verification through personal or business bank statements cannot confirm 100% the true income of the borrower and therefore cannot confirm the borrower’s repayment ability.

Does it matter what type of property you have to get a bank statement loan?

You will be surprised to learn that you cannot only buy a primary residence with a bank statement loan, but also non-owner-occupied residential investment properties including VRBO and AirBnb and one- to four-unit residential properties.

Does a bank statement loan have a different APR loan amount than other loans?

Yes a bank statement loan has a higher APR or the annual interest rate for the loan, due to the fact that the lender is taking a risk with this loan. Bank statement mortgage rates are typically 0.5% to 1% higher than the interest rate for a conventional mortgage.

Is there a way to reduce the rate?

As with all home loans, the interest rate varies depending on your credit score, debt-to-income ratio, loan-to-value ratio, and other factors. For a better interest rate, a credit score of 680 or higher, a debt-to-income ratio of at most 50%, and a loan to value ratio of 85-90% is recommended.

Why do other banks say no to Bank Statement Loans?

Because the borrower is not providing income verification in the traditional way, the lender would be taking a risk on the borrower since this type of income verification through personal or business bank statements cannot confirm 100% the true income of the borrower and therefore cannot confirm the borrower’s repayment ability.

Does it matter what type of property you have to get a bank statement loan?

You will be surprised to learn that you cannot only buy a primary residence with a bank statement loan, but also non-owner-occupied residential investment properties including VRBO and AirBnb and one- to four-unit residential properties.

Does a bank statement loan have a different APR loan amount than other loans?

Yes a bank statement loan has a higher APR or the annual interest rate for the loan, due to the fact that the lender is taking a risk with this loan. Bank statement mortgage rates are typically 0.5% to 1% higher than the interest rate for a conventional mortgage.

Is there a way to reduce the rate?

As with all home loans, the interest rate varies depending on your credit score, debt-to-income ratio, loan-to-value ratio, and other factors. For a better interest rate, a credit score of 680 or higher, a debt-to-income ratio of at most 50%, and a loan to value ratio of 85-90% is recommended.

 What is a preapproval for a bank statement loan?

A preapproval for a mortgage is a document or letter stating how much the lender is willing to let you borrow to pay for your home. It is not required for acquiring a bank statement loan but it can help you predict how much you will get if you apply and what you need to improve to raise that amount.

What information do I need before I call to get preapproved?

A preapproval is based on your financial status i.e. your income, how much you have in your investment account and the bank, and your debts. The mortgage lender will also most likely do a hard inquiry which checks your credit history to determine whether you are responsible with your existing credit accounts.

What is the process for a bank statement loan and how long does it take?

To get a preapproval, you must provide your personal and/or business bank statements as a business owner and be willing to get a credit check. Many lenders will use the 28/36 rule when determining how much per month you would be able to pay for mortgage payments. This means that your mortgage payment should be no greater than 28% of your income and your total debt payments, any debt in addition to your mortgage payments, should be no greater than 36% of your income.

How long does it take for a Bank Statement loan to process?

Bank statement loans are processed through a manual underwriting process which means that it is reviewed by a person and not a computer since you can expect to be rejected by the computer algorithm if you are self-employed. Since these loans are being reviewed by a human being, they can take between 21 and 30 days to process. It could take longer depending on the borrower’s circumstances.

What are my choices for terms on a bank statement loan program?

There are many options for your loan term. The first one is called the 5/1 ARM or adjustable mortgage rate. This term means that you don’t pay interest for the first five years and then interest is accounted for in the 6th year. A 7/1 ARM is similar except the no interest payments last for seven years. Same with the 10/1 ARM but with ten years. Lastly, a 30-year fixed mortgage is one where you have 30 years to pay off your mortgage and your interest rate is fixed.

What are the benefits and drawbacks of each?

For a 5/1 ARM, the benefits are as follows: since interest rates can change over time, a 5/1 ARM is designed to have lower interest payments during the first several years after the fixed 5 year period which means you will have a lower initial interest rate; If you put money saved from that lower interest rate back directly toward the principal or total loan amount, even if the interest rate adjusts upward, you’re paying less in interest because the balance your paying the interest on is lower; It is also good for people who aren’t planning on staying in their home for long because it is a starter home. You might move before the interest rate ever changes. A 5/1 ARM can have several caps, limiting the payment amount and the interest rate increase.

For a 7/1 ARM, the benefits are similar to a 5/1 ARM.

For a 10/1 ARM, the benefits are as follows: lower initial interest rate and a longer fixed period which allows the homeowners to hold onto the mortgage longer before the rate begins increasing or decreasing.

The disadvantages for all ARMs are as follows: The interest rate might increase due to the market during that year. Because the initial rate of ARMs is lower than the prevailing market rate on fixed-rate mortgages, your long-term payment will typically be higher. Refinancing will come with fees and closing costs of 3-5% of the loan amount. ARMs are complex and come with complicated rules, fees, and payment structures that can confuse the borrower. You will also have a pressure to sell your home or refinance your mortgage before the ARM period expires which is a drawback if you don’t get the offer you expected or if you can’t get approved for a refinance.

For a 30-year fixed mortgage, the benefits are as follows: your monthly payments will be lower than the other loan options, you can repay back the mortgage at any time without prepayment penalties, your interest rate is fixed so there is no concern for it rising, and you can purchase your home with as little as a 3% down.

For a 30-year fixed mortgage, the disadvantages are as follows: you will be paying more money back than all the other loans since the low interest rate is still applying for 30 years, there is no chance of your interest rate decreasing even if the interest rate that year is lower because it is fixed with this loan, and you will not have any discipline with this loan and put any of your money towards extra principal every month since a longer time to pay a loan back results in a mindset that you have a while to pay it off.