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What is a ‘Bank Statement’ Loan?

Written by Posted On Thursday, 15 April 2021 00:00

A relatively new home loan program, well one that has been around for four or five years, is called the ‘bank statement’ loan. Most every lender offers such a program albeit with different names. The evolution of this type of program was a result of mortgage lending restrictions introduced over a decade ago. The Consumer Financial Protection Bureau, or CFPB, put an end to so-called ‘no documentation’ or ‘no-doc’ loans. These loans were issued to people who did not or could not verify their income. 

At the height of the real estate boom in the mid-2000’s, buyers who otherwise wouldn’t qualify for a traditional loan could buy a house with very little documentation. Because of this ease of qualifying, real estate markets heated up, driving up home prices. Buyers would essentially ‘flip’ a property after just a few months making money on the sale.

Soon thereafter, the bubble burst. There were no more people to issue such loans to. In turn, that meant that buyers who intended to flip a property for a short term purchase discovered the home they intended to sell couldn’t find any buyers. Because they couldn’t qualify for a traditional, verifiable loan, they began to default. And it all went downhill from there.

The CFPB stepped in and put an end to all this. New guidelines were introduced to stem the tide of foreclosures in an attempt to get the economy back on track. One of these new guidelines was the ‘ability to repay,’ or ATR. This guideline required lenders to verify and document income from applicants and prove they had enough monthly income to pay back the new mortgage. Essentially, the mortgage industry returned to the ‘good old days’ where lenders verified pretty much everything.

As the industry began to settle down and lenders returned to traditional underwriting, a new program was introduced which didn’t directly verify monthly income but did so in another way. Instead of paycheck stubs or income tax returns, lenders would verify income by looking at bank statements over the past 12-24 months. Why? Bank statements, either personal or business, would show deposits being made. Lenders could determine how much someone made each month by adding up all the deposits.

Such loan programs were aimed primarily at self-employed borrowers. Many self-employed borrowers could have somewhat complicated tax returns. Sole-proprietors, LLCs, Trusts and Corporations all filed tax returns. Throw in things like depreciation, expenses and third-party income and one could see how much paperwork would actually be needed. Instead of these various income tax returns, lenders simply looked at bank statements for third-party verification of income.

These loans aren’t exactly ‘no-doc’ or ‘low-doc’ programs but they’re very close to it. Minimum credit score requirements are typically higher compared to a fully documented loan and more down payment will be needed at the settlement table. The program is not only more convenient for the buyers but also require less overhead when evaluating a loan program submitted by someone who is self-employed or relies on income outside of a monthly paycheck.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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