A business bank statement loan is one of the more popular residential loan programs that serve as an alternative financing option to a conventional mortgage. This type of loan has become increasingly popular in recent years as more individuals shift towards self-employment and business ownership.
Business bank statement loans, as the name implies, allow self-employed individuals to qualify using business bank statements instead of relying on traditional tax returns. This approach prevents tax write-offs and business expenses from artificially lowering qualifying income, providing a more accurate reflection of actual business cash flow. Individuals who have substantial business revenue but relatively low taxable income benefit greatly from the program.
How is Income Calculated?
The exact income calculation varies based on the strength of the loan file. Most programs evaluate the gross business deposits over the most recent 12 or 24 months and apply an expense factor, ranging from 20% to 50%, to determine the qualifying income.
For example, a business that generates $250K in trailing revenue over the past 12 months, with an allowable 20% expense factor, could potentially generate $16,666 in qualifying income [($250K / 12) X 80%]. This assumes the borrower owns 100% of the business and meets the lender’s other underwriting requirements. If the borrower owns less than 100% of the business, this income may be haircut proportionally based on their ownership percentage.
It is important to note that underwriting will not consider all deposits. Transfers between accounts, loan proceeds, or other non-revenue deposits may be excluded from the income calculation. Additionally, any large deposits or unusual deposits that cannot be properly documented or sourced will be excluded.
What Does Underwriting Look For?
In addition to calculating income, underwriting will need to ensure that the business is stable. Underwriting will analyze the deposit history to identify significant fluctuations or a declining income trendline over the 12 months. If there is a negative trendline, 24 months of bank statements could be used to paint a clearer picture of the business’s income history. Seasonal businesses may also be able to explain fluctuations in revenue by documenting predictable periods of higher and lower business activity.
What Are the Disadvantages of a Business Bank Statement Loan?
Although bank statement loans can provide significant advantages for self-employed borrowers, there are also trade-offs to consider.
- Higher interest rates: These are non-QM (qualified mortgage) products. Due to this, interest rates are generally higher than comparable conventional mortgage financing.
- Larger down payments: Borrowers may need to contribute more money toward the purchase.
- Reserve requirements: Some programs require borrowers to maintain several months of mortgage payments in liquid reserves.
- Additional underwriting scrutiny: Lenders need to establish that deposits represent legitimate business revenue and affirm the business is financially stable.
- Potentially higher costs: Mortgage pricing, fees, and other loan expenses may differ from conventional financing.
Is a Business Bank Statement Loan Right for You?
The main takeaway is if you are self-employed and considering a residential mortgage loan, a business bank statement loan may be worth exploring. Don’t let tax deductions limit your ability to qualify. Give us a call at (760) 930-0569. We will be happy to discuss your situation and help find the right financing options for you!
