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How Do Lenders Calculate Income With Bank Statement Loans
How Do Lenders Calculate Income With Bank Statement Loans?
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Alternate income documentation is one of the unique characteristics of bank statement mortgages. This is because they are designed primarily for small business owners, business executives, and other non-traditional earning individuals who may need help to provide consistent tax returns or W-2s in the application process. More specifically, as opposed to furnishing income proof in the normal way, the conditions set out by the lenders do not take into account the gross income figures but rather concentrate on the applicants’ bank statements.
An Assessment of Income in Bank Statement Loans by the Lenders
Classification of bank statements necessary for analysis:
Personal Bank Statements: Some creditors wish to use personal bank statements to compute the income statement. However, this is rare and applies when someone has nonbusiness banking or business accounts.
Business Bank Statements: The lenders would also require access to the employer’s business bank statements. Mortgage underwriters look at the history of funds going in and out of the business account to ascertain the business’s net cash flows.
Length of documentation:
Applications must, however, have passed a minimum of twelve months. Most lenders have that policy. However, some non-QM wholesale lenders require twenty-four months of bank statements. There are 12-month and 24-month bank statement loans for self-employed borrowers. The 24-month bank statement loans have a slightly lower rate than the 12-month bank statement loans.
Gross Deposits Calculation: Total Deposits: During the review, the mortgage underwriter will be assisted by establishing and depositing eligible deposits (income relating to the forwarding of the business) within the review period, and these are added.
Exemptions: Concerning income computations, transfers considered gainful transfers between accounts, refunds, or immediately recognized transactions, such as the cash received from selling an asset an organization has owned for a long time, can be counted as unused.
Income Determination: Personal Deposits: Personal bank statements are such that the lender may assume that some deposits are income. Thus, a certain percentage of the deposits are allocated as personal use cash. So, while analyzing personal account statements, the lender will look for these deposits.
Business Deposits: Business deposits are another aspect of the loan application process. Total deposits are usually taken. A certain percentage of the income is deemed. A thumb rule on the typical business-related costs is considered.
Expense factor: Lenders often apply expenses to gross deposits to sustain business operations. For a particular lender who believes that 30% of deposits will be spent and operational expenses incurred, only 70 % of total deposits will be considered income. Percentages will change depending on the types of businesses and industries.
CPA Letter: There are certain situations (for instance, in the case of self-employment or a standard small business) where a lender might request a letter from the CPA regarding certain elements, such as business expenses, on a few occasions.
Illustrative Calculation:
Business Bank Statements (24 months):
- For 24 months, the cumulative allowable deposits are $ 240,000.
- The expense factor of 40% is applied where only 60% of income from the deposits is left.
- 240,000 * 0.6 =144,000 per month.
- Thus, this is calculated over two years: 144,000/24, which gives a monthly income of 6,000.
Debt-to-Income Percent (DTI):
After arriving at the borrower’s expected income, the lender should calculate the Debt-to-Income Ratio (DTI). The DTI ratio is the proportion of the debtor’s income that goes toward repaying loan commitments versus the general income level.
Key Considerations
Increased down payments: Like other self-employed loans, only a few banks require this post-qualification. Bank statement loans, on the other hand, have a very high down payment option, ranging from 7.0 to 10%, as opposed to traditional mortgage loans.
Interest Rates: Such loans normally attract high interest rates due to being self-employed and the chances of being unable to show proof of income.
Minimum Credit Score Requirements: Different lenders use different credit requirements. Therefore, most mortgage lenders of bank statement loans will require a minimum credit score between 600 and 660.
Using bank statements enables a lender to scrutinize the bank receipts of a self-employed individual and determine the income level for that individual. This way of income calculation is more informative than other relevant documents. Typically, a single bank statement analysis is done over the past 12 to 24 months. An expense factor estimate is made. A net qualifying deposit income is calculated. This allows people with non-income paychecks to purchase homes. No income tax returns or other income documents are required on bank statement loans for self-employed borrowers.