Homeowners come from all backgrounds and occupations, which means the mortgage loan process can’t be the same for each person.
A major piece of the application process involves presenting your income to your lender. This proves you can make your mortgage payments on time each month.
However, income isn’t straightforward for all borrowers, including those who are self-employed. These borrowers have another option: non-qualified mortgages (QM) using bank statements.
Learn more about how non-QM loans work, and how you can qualify for a mortgage using bank statements.
What is a non-QM loan?
When a borrower begins a traditional QM loan process, their lender will ask for pay stubs and recent tax returns. Some lenders may deny you if you are unable to provide this proof of income.
QM loans are backed by the government, so they must meet the requirements set by Fannie Mae, Freddie Mac, or the FHA or VA. QM loans such as conventional mortgages require certain documentation to move forward.
Non-QM loans, on the other hand, are not backed by these entities. The documentation requirements can be more flexible, and allow bank statements in lieu of pay stubs.
Non-QM loans help non-traditional borrowers get a mortgage
Borrowers who are paid regularly by their employers and receive W-2s can easily hand these documents over as proof of income and move forward.
If you’re self-employed, this isn’t as simple. Your income is documented, but not through pay stubs. And your taxes may be more complicated due to business expenses.
Lenders offer non-QM loans as a way to help these non-traditional borrowers. They understand that just because you aren’t receiving regular pay stubs, this doesn’t always mean you can’t afford a mortgage.
Who qualifies for a bank statement mortgage?
The bottom line of all mortgage applications is: Can you afford to repay this loan?
Non-QM loans exist with the understanding that a variety of borrowers can indeed repay their loan, but they may need to prove it a bit differently.
The types of borrowers perfect for non-QM loans include:
- Business owners
- Self-employed individuals
- Real estate investors
- Seasonal workers
Non-QM loans can be used for primary or secondary properties or investment properties.
Getting a mortgage using bank statements is valuable because you can show a lender exactly how much comes in and out.
Many people today receive bank statements electronically or through the mail. These statements will include activity from your checking and savings accounts, detailing all deposits and withdrawals.
You can use personal or business accounts to prove your income. Your lender will check for several details on these statements, including:
- How much money is in your account
- Where the cash is coming from
- How long the money has been there
- For any overdraft fees or recent large purchases
- If you have enough funds to pay at least a few months of your mortgage plus a down payment
- If you can cover the closing costs on the loan
Your lender will decide how many statements they need to see. Generally, they will want to see enough to evaluate the cash flow in your account and make sure you didn’t drop the money in recently through a loan or other borrowed funds.
Be prepared to provide additional documentation, including proof of why your funds may fluctuate or appear lower at certain points.
This may be a regular part of your business cash flow, but your lender won’t know this unless you explain and provide proof.
How to qualify for a mortgage using bank statements
To qualify for a non-QM loan with bank statements, you first will need to connect with a lender who offers this option and has experience with this type of loan.
The underwriting process for non-traditional loans can be complicated, so you will need a lender who understands how it works and can accurately interpret your income statements.
Since each lender will approach the non-QM process a bit differently, ask them upfront what types of documentation they require so you can properly prepare. Most will require one to two years of bank statements.
Some non-QM options will include the use of 1099 tax forms or recent asset statements.
How to prepare for a non-QM loan
Mortgages using bank statements also provide flexibility with lower credit scores and higher debt-to-income (DTI) ratios. River City Mortgage, for example, will accept scores as low as 680.
However, it’s still wise to work on your DTI ratio and credit score prior to applying for a non-QM loan, because this will help you secure your best rates and highest loan amounts.
Gather all required documentation prior to applying, and be prepared to quickly locate further documentation or explanations for any questions or concerns your lender has.
If you’re ready to get started, the experts at River City Mortgage are here for you.
Call us today to ask questions and help us get to know you and your unique loan scenario. We look forward to working with you.