Stated-Income

Reserves and Mortgages: How Much Do You Need to Qualify for a Loan?

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What happens after closing? You start making your mortgage payments, pay your property charges, and so on. Do you have enough funds to cover these expenses in case something unexpected happens? These “leftover funds” are called financial reserves.

Lenders will look into these funds to determine if you have enough set aside before they approve your mortgage. As to the minimum level of reserves required, that will depend primarily on your loan type, property, and borrower profile.

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What Are Reserves?

Reserves are assets that are available to you post-mortgage closing. By available, these assets must be readily convertible to cash for your use, per Fannie Mae, who together with Freddie Mac, is the largest purchaser of mortgages in the secondary market.

To make them more relatable, think of these funds as x months’ worth of your total housing expenses as represented by PITI or PITIA:

  • Principal
  • Interest
  • Taxes
  • Insurance (homeowners insurance, mortgage insurance)
  • Homeowners association dues, other assessments

While they are not as popularly discussed as down payment and closing costs, reserves are an important aspect of your mortgage that you should prepare for, save up if you must.

Eligible or Not Eligible Assets for Reserves

Not all assets are eligible to be considered as reserves. Aside from being liquid assets, they must be redeemed/vested, taken from personal bank accounts, or derived from the sale of an asset.

Aside from cash, these are acceptable sources of reserve funds:

(i) savings/checking accounts, (ii) stocks, bonds, certificates of deposits, trust accounts, or any investments, (iii) the portion of the retirement savings account that has vested, and (iv) the cash value of a vested life insurance policy.

As to retirement accounts, not all of the whole vested amount will be considered, e.g. 70% of 401(k), IRA and other related accounts’ vested value.

Stock units become unacceptable if they are from a company or corporation not listed with the SEC. This applies to stock options and restricted stock units that have not vested.

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You can’t also use personal unsecured loans or proceeds from cash-out refinance for your reserve funds.

This is why lenders verify assets for reserve requirements (although this asset verification applies to down payment and closing costs) to ensure that the borrower has funds safely tucked in and that these funds are not illegally sourced or additionally burdensome to the borrower.

How Much Do You Need for Your Reserves?

Your minimum reserve requirement rests on a combination of various factors. But a good starting point would be the property type, i.e. its occupancy status and the number of units.

From there, you can look up what each loan type’s reserve requirement is:

  • FHA loans: This loan program does not have a reserve requirement on one-to-two properties. But for borrowers with non-traditional credit or those requiring manual underwriting, one month of reserves is required. On three-to-four unit properties, reserves worth three months of PITI are required.
  • VA loans: Just like FHA loans, these loans for military personnel require (i) no reserves on one-to-two unit properties and (ii) six months’ reserves on three-to-four unit properties. The borrower also pays additional three months of reserves for every rental property he or she owns.
  • USDA loans: Although these government-guaranteed loans don’t really require cash reserves after closing, having two months of reserves can be a compensating factor.
  • Conforming Loans: The reserve requirements for Fannie Mae take into account the transaction type, the property’s number of units, the borrower’s credit score and LTV, and debt-to-income ratio, the type of underwriting (DU or manual). This is an example of Freddie Mac’s reserve requirements matrix.
  • Jumbo Loans: Reserves on those loans can be equal to three months, although they can go higher depending on the size of the loan.

Indeed, buying a home goes beyond closing. There’s your house to take care of after the transaction closes. Despite reserves being a requirement, it’s wise to have funds set aside for your home.

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Take Your Pick From These Government Mortgages for Buying Fixer-Uppers

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Fixer-uppers. Their affordable price makes them attractive to home shoppers like you but their state of affairs (read disrepair) might not appeal to banks. What to do? You can try government mortgages.

Aside from standard purchase/refinance loans, the FHA, VA and USDA back, insure or make (in the case of USDA) mortgages for buying and/or improving fixer-uppers. These government mortgages for home rehabilitation might just fulfill your dream of having just like that lovely home across the street.

Are you ready for homeownership? Let’s help you find an approved lender.

The Government Mortgages for Home Repairs

Government-backed loans are traditionally popular for their more flexible and lenient guidelines than most conventional/conforming loans. Their mandate is to help consumers buy a home despite their income, credit, or (lack of) down payment.

With prices for fixer-uppers a steal, it’s understandable why some opt for these homes, repairs and all. Moreover, these homes are financeable with the help of the government.

FHA 203k Loans

They are for purchasing and turning a fixer-upper home with scores of allowed improvements.

Simpler, less costly home projects can fit the bill of a streamline 203k loan of at least $5,000. These repairs usually include but are not limited to replacing roofs, upgrading HVAC systems, painting the exterior and interior of the house, replacing the septic tank, and installing appliances.

Then there’s the standard 203k loan that covers more complex repairs involving walls, room additions, and improvements that take more than 30 days and keep you out of the home until such time as the work is finished. These renovations are capped at $35,000.

The home will be appraised based on the work to be done, called after improved value. Still, the FHA’s down payment remains as low as 3.5%, credit doesn’t have to be stellar, and debt-to-income ratio can go as high as 31%/43%.

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VA Home Loans

VA-guaranteed loans allow for the simultaneous purchase and improvement of a home.

For instance, Native American Direct Loans (NADLs) cater to Native American veterans to build homes according to their wishes.

These direct loans are also used to buy a home with repair or improvement costs that may be rolled into the loan.

Being VA loans, NADLs have no down payment, no private mortgage insurance, and low closing costs. They are 30-year fixed-rate mortgages with rates at 4%.

The VA also offers grants for veterans with disabilities to adapt their homes and make them more accessible (barrier-free).

USDA Repair Loans

Among the three government mortgages, USDA Section 504 loans are strictly to finance repairs on existing owner-occupied homes. These repairs can go toward removing health and safety hazards.

Families with very low income are the target borrowers of the loans up to $20,000, along with very-low-income elderly who may be eligible for grants not exceeding $7,500. Grants may be combined with loans if a borrower shows that he/she can’t repay loans fully.

Repair loans have fixed rates of 1% and repayment terms of 20 years. Grants must be repaid if the recipient sold the home subject to the grant within three years.

To recap,

  • FHA loans for purchase and deep rehabilitation
  • VA loans for veterans looking for construction/home improvement loans
  • USDA loans for repairs only, grants may be included

So, which government loan is it gonna be?

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Jumbo Loans Get Redefined as Conforming Loan Limits Increase in 2018

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Jumbo loans just got bigger. Beginning 2018, the conforming loan limit on a one-unit home in most parts of the U.S. will increase to $453,100 from $424,100. In high-cost counties, the standard loan limit will also increase to $679,650.

Those borrowing money higher than the standard conforming loan limits belong to the jumbo loan club. Qualifying for jumbo loans is tougher than on traditional loans because of inherent market risks and individual lender standards.

Do you qualify for a jumbo loan? Ask a lender today.

Conforming Loan Limits Boost Jumbo Loans

The Federal Housing Finance Agency who regulates Fannie Mae and Freddie Mac has raised the conforming loan limits to reflect a 6.8% increase of home prices in the U.S. based on the seasonally-adjusted expanded-data House Price Index (HPI).

Consequently, the 2018 conforming loan limit is $453,100 and it can reach $679,650 at most to account for one-unit homes in expensive counties in the U.S.

A list of 2018 conforming loan limits is accessible here.

Fannie Mae and Freddie Mac purchase loans within those loan limits, thereby known as conforming loans. The GSE loan limits also affect other government loan programs.

For example, VA loans match GSE loan limits to calculate the amount of VA guaranty. FHA loan limits in high-cost areas are based on Fannie/Freddie loan limits.

Because jumbo loans fall outside of standards set by the GSEs and relevant government agencies, they are underwritten by individual lenders.

Qualifying for Jumbo Loans

The territory of jumbo loans is vast. These loans for bigger homes for property flippers, investors and more are offered at varying terms and conditions.

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In terms of process, applying for a jumbo loan is no different from the usual standard loan because lenders will still weigh these qualifications:

  • Credit scores on jumbo loans may be higher or at par with conforming loans. There might be some wiggle room for borrowers with less-than-perfect scores but they’ll get higher rates than those with excellent credit.
  • Debt-to-income ratio is ideally 43% and below. But ample cash reserves of at least six to 12 months can possibly make up for an above 43% DTI or a low credit score for that matter.
  • Down payments are usually higher on jumbo loans. They can be at least 10% up to 30% of the purchase price, depending on the lender.

Documenting income is tricky for self-employed borrowers taking out traditional loans. For jumbo loans, lenders might require just one year of tax returns filed with the IRS to document income from a stable or growing business.

To be fair, Fannie Mae has eased its guidelines in documenting self-employment income, requiring only one year of filed tax returns to qualify for a conforming loan.

Rates on jumbo loans are higher than on conforming loans because they carry the risk of not being eligible for purchase by Fannie Mae or Freddie Mac.

If you’re buying a home in a high-cost area, your loan might still be within conforming standards. Ask lenders about this and other loan matters.

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False Stated Income: Here’s Why You Should Never Overstate Your Income

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Misstating income was pervasive back then, the Great Recession is proof. With lenders required to evaluate a borrower’s ability to repay his/her mortgage, income remains relevant to qualify for a mortgage. This is especially true for stated income loans whose approval primarily hinges on the borrower’s income.

Despite regulations, fraud is still present even in today’s revamped stated income loans. There is the case of false stated income when a borrower “innocently lies” about his/her income to qualify for this kind of mortgage and/or a higher loan amount at that.

Find out why it’s never a good idea to lie about your qualifications that might result in loan denial and how lenders protect themselves from this kind of mortgage fraud.

Find out if you qualify for a loan, too.

Overstating Income Is Always a No-no

According to a Federal Reserve study, U.S. median family income rose 10% between 2013 and 2016.

Generally speaking, mortgage borrowers complete a Uniform Residential Loan Application, specifically Form 65 for those who want to get in the stated income program as per Freddie Mac that purchases mortgages including stated income loans in the secondary market.

Income, employment, and assets are checked in the normal course of making loans. Still, there are instances when some of this self-reported information is not verified.

For instance, Freddie Mac notes that the borrower’s employment or his/her source of income is the only item validated by a lender as it relates to income.

Self-employment income is generally harder to verify in itself because of certain expenses that get written off. But employment income can be overstated using fake Form W2s or by declaring additional sources without proper documentation.

Against this backdrop, it is possible for borrower-reported information, erroneous at that, to go unchecked. While one might be able to get away from lying on the loan application, the act is punishable by law.

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How Lenders Deal With False Stated Income

In Freddie Mac’s best practices combatting false stated income fraud, it recommends that lenders let their most seasoned loan officers handle stated income loans.

The government-sponsored enterprise encourages lenders to compare the borrower’s characteristics, e.g. age, employment position, education and experience vis-a-vis the income declared on his/her application.

Lenders might also have to look into how the borrower accumulated his/her assets. More importantly, how does the stated income loan figure into his/her monthly debt obligations.

If a salaried employee wishes to qualify for a stated income from an additional income source that is not documented, he/she must be able to specify in the application form which parts of his/her income are from this additional source.

A borrower who can’t qualify based on traditional income documentation such as W-2s and paystubs may not be eligible for a stated income loan.

Similarly, a non-qualifying spouse’s income must not be added to the borrower’s income for mortgage qualification purposes.

Lying about your income is risky for you and the lender because you might not be able to repay your loan later on. More than loan denial, you could face legal consequences if caught.

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This Could Explain Why Your Monthly Mortgage Payment Changed

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It happens. Your monthly mortgage payment has increased for reasons unknown to you. It could be an error on the part of the loan servicer; but most often than not, the change has to do with the inner workings of your mortgage.

After all, you chose a mortgage mainly based on affordability or its low monthly mortgage payment. Better to understand how mortgage payments can change and what you can do about it.

Speak with a mortgage expert today.

Three Reasons Why Your Monthly Mortgage Payment Increased

The Consumer Financial Protection Bureau listed three main reasons why a monthly mortgage payment changes or goes up. These are:

  1. Your interest rate increased.
  2. Your property taxes or homeowners insurance premiums increased.
  3. Your loan servicer/lender assessed fees added to your mortgage payment.

ARM and Rate

If you have an adjustable-rate mortgage, your interest rate will change throughout the life of the loan. The frequency of this rate adjustment depends on how the ARM plan is structured.

For example, you have a 5/1 ARM.

  • The “5” represents the number of years that the rate will not change or remain fixed.
  • The “1” represents the frequency that the rate will change after the fixed-rate period.

In this case, the rate will adjust once every year after five years of having a fixed rate. During this “floating” period, the rate could increase or decrease and when it does, the mortgage payment will go up or down as well.

An ARM rate is tied to an index plus a margin. This index reflects the general market conditions tracked by LIBOR, COFI, MTA or MAT (12-month average of Treasury bills) and other third parties.

The margin is the percentage points added by your lender to the index. Together, the index and margin make up your interest rate after the initial fixed-rate period has expired.

While it’s true that ARMs can go up, thus the increased monthly payments, these increases are checked by caps that (i) limit how high the rate can go or (ii) how much the monthly mortgage payment can go up.

Property Taxes and Homeowners Insurance Premiums

Even fixed-rate mortgages, which are hailed for their stability, can see an increase in their monthly payments.

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Remember your PITI — principal, interest, taxes, and homeowners insurance premiums. The principal and interest components of a fixed-rate mortgage will remain the same throughout the life of the loan.

As to the taxes and homeowners insurance premiums, they are placed in an escrow account by the lender at closing. In case of tax hikes and premium increases, the lender will initially pay for any shortfall until such time as it has adjusted your monthly payment.

These fluctuations in property taxes/homeowners insurance premiums can increase your monthly mortgage payment.

Lender Assessed Fees

Were you late on your last payment? This and other fees depending on the status of your mortgage can inflate your next mortgage payment.

Late fees, for instance, can be 4% to 5% of the overdue amount. This is provided that your lender is authorized in your mortgage contract to collect late payments.

For more information or clarification on any assessed fees or other payment concerns, don’t hesitate to write to your lender or loan servicer.

It certainly matters to take time to shop and ask around about mortgages before getting one. Know before you owe and ask questions.

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What’s With Nonprime Mortgages? Should You Be Afraid of Them?

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They say nonprime mortgages are coming back. In the second quarter of 2017, securitized nonprime loans reached $1.08 billion per CNBC, citing Inside Mortgage Finance. Still, were they ever really gone in the first place? If so, what were they back then?

Instead of being afraid, try to understand the workings and benefits of nonprime mortgages better. One might just be your ticket to financing your first home.

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Getting to Know Nonprime Mortgages

Let’s get this out. There’s a difference between nonprime mortgages and subprime mortgages during the housing boom. Although back then, mortgages with little to no documentation were considered nonprime.

You can rest assured that exotic mortgages that caused the housing crash won’t come back anytime soon. The creation of the Dodd-Frank Act called for many layers of vetting for mortgages. Today’s loans have never been more pristine as a result. However, lenders ended up tightening the credit box even for those who are qualified.

If lenders have to triple-check a home loan, they’d do so because of regulations. The process takes time in itself, putting conventional loans further out of reach for some borrowers.

This tightening of traditional mortgage credit plus the rigorous vetting of today’s loans gave rise to nonprime loans.

Fear Not Nonprime Mortgages

Specialist lenders make up the non-prime sector. They have their own guidelines with respect to the nonprime mortgages they are making – a departure from the usual lending standards embodied by qualified mortgages.

See how today’s nonprime loans differ from past subprime loans:

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  • Credit: Nonprime lenders are well aware that credit scores can hinder a borrower’s loan prospects, even Fannie Mae has eased up its guidelines with respect to disputed tradelines on credit reports. Thus, nonprime lenders can be more accepting of people with bankruptcy or foreclosure records, checking on their income and cash flows.
  • Income: Verification of income is a must or strictly enforced as one known wholesale nonprime lender said. This is how they gauge the borrower’s ability to repay.
  • Down payment: Nonprime loans have higher down payments than traditional mortgages, say FHA loans with their 3.5% of the purchase price.
  • Loan size: You can find jumbo loans for investment properties that usually exceed the conforming loan limits.

Are Nonprime Mortgages Safe?

During the housing boom, anyone can easily take out a loan without the proper underwriting process. Since the borrower’s ability to repay the loan was not examined, it was also easy for loans to fall into delinquency. Foreclosures were initiated that they hit a record-high 81% in 2008 – a whopping 225% increase from 2006.

Angel Oak, a wholesale nonprime lender that expects its nonqualified and nonprime mortgage originations, e.g. stated income, to reach $1 billion this year, notes that down payments represent life savings for most borrowers. The higher the down payment, the bigger the investment.

Thus, borrowers who put bigger down payments as in nonprime loans are more compelled to meet their monthly dues so they won’t lose their investment. This can be an effective deterrent to delinquencies.

Why don’t you give nonprime mortgages a look? Speak with lenders today.

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Income Matters: How Much Is Required to Qualify for a Mortgage?

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Forget down payment for now. When you plan to get a mortgage, one of the very first things to consider is your ability to repay this debt. That’s why, verification of income on all mortgages, stated income loans included, is an essential step to get approved for the mortgage.

Lenders primarily want to know if you have a steady and reliable income to support your monthly payments. When can a lender say that you are making enough to be able to afford your loan payments? How do you determine this income required for a mortgage?

Find the answer to the question below. Find lenders here, too.

Understanding Income and Mortgage

Stated income loans of yesteryears can attest to this. A decade ago, it was easy to make loans based on the borrower’s word that he/she is earning this much. The stamp of approval did not rely on any verification.

But that’s highly unlikely now. Stricter rules and policies are in place to ensure loans are safe for consumers and lenders. Today’s stated income loans, for example, may forgo tax returns, but alternative documentation like assets and bank statements will be verified.

Income’s importance in mortgage qualification can’t be emphasized enough. And how much you need in order to qualify is a combination of several factors.

Calculating Income Required for Mortgage

To determine the level of income you need to qualify for a mortgage, consider the following:

  1. Monthly housing expenses. This is what you spend on housing, e.g. mortgage payment — principal, interest, property taxes and homeowners insurance (one-twelfth), homeowners association fees — or rent.
  2. Monthly liabilities. This refers to your total monthly expenses, housing and other debt obligations such as car loans, student loans, alimony/child support, and payments on loans that you are a co-borrower to. Utilities are not included.
  3. Mortgage amount. The amount you need to borrow for your home loan.
  4. Mortgage rate. The interest that you’ll receive on your mortgage. If you are getting a fixed-rate mortgage, this won’t change throughout the life of the loan. For an adjustable-rate mortgage, the start rate will adjust periodically. You can get pre-approved to get a definite rate from the lender or shop for mortgage quotes for now here.
  5. Mortgage term. The length of time to pay off the loan. This affects the calculation of your monthly principal and interest payments.

There are online calculators that will crunch the numbers based on those variables.

Knowing Your DTI

Where does your current monthly income fit in all of this?

Lenders use debt-to-income ratio to measure your ability to comfortably take on the loan given your total monthly liabilities including housing costs as noted above and your gross monthly earnings.

To get this DTI, you’ll divide your monthly liabilities by your monthly income before taxes. Your DTI calculation may be different from that of lenders because not all sources of income may be qualified for mortgage purposes.

Nonetheless, your DTI ratio will be your guide in determining your capacity to afford a mortgage for now. Lenders and loan programs have varying standards for DTI ratios. Most recently, Fannie Mae has expanded its maximum allowable DTI ratio to 50%.

Qualifying and verifying income are two different processes and lenders are the best people to ask about their rules. Speak with one today.

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How Latest Tools, Eased Rules in Appraisals Benefit Mortgage Borrowers

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In October, at least three new tools that would improve how appraisals are being done were introduced to the market. Add to that the more relaxed guidelines like property inspection waivers by Fannie Mae and Freddie Mac, relying less on human appraisers.

The easing of rules and more automation could mean a less costly and better mortgage experience for borrowers. Valuations or appraisals on homes remain a key ingredient in making loans. They ensure that homes are not overvalued or undervalued – a scenario risky for both borrowers and lenders.

Learn more about these recent developments. Let’s help you find a lender, too.

More Tools to Improve the Appraisal Process

These companies that provide real estate insights and analytics and dabble into mortgage finance unveiled their respective products that aim to enhance the way appraisals are made.

  1. CoreLogic’s Appraisal Xcelerator – a digital tool that streamlines the process of scheduling appraisals among the lender, borrower, real estate agent, and appraiser. This technology, according to one company executive, will shorten the scheduling interaction among the parties above, thus reducing turnaround times and enhance overall customer experience.
  2. First American’s Smart Valuations – an offering that banks on reducing turnaround times by 16% to 20%, improve quality and cost-efficiency of appraisals as well. In propping up the product, the company points to larger housing markets where appraisals could take months to finish.
  3. HouseCanary’s Agile Appraisal™ – a product for residential appraisers, it mainly cuts the time needed to make standardized and reliable appraisals to five days. Through its regression technology, appraisers can address issues, e.g. property, location, time characteristics for a faster and more accurate appraisal.

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No Appraisals From Fannie and Freddie

Fannie Mae and Freddie Mac have gradually introduced changes to their mortgage guidelines. One significant enhancement is waiving property appraisals on certain loan transactions.

Under Desktop Underwriter® 10.1, Fannie Mae is offering property inspection waivers, as expanded, on purchase (primary and second homes up to 80% LTV) and refinance (limited cash-out, cash-out) transactions.

Particularly, an appraisal may be waived on such transactions if the subject property has a prior appraisal that can be pulled from Fannie Mae’s property database. In case of refinance loans, the prior appraisal must be associated with at least one borrower of the loan to be refinanced.

Freddie Mac did follow Fannie Mae’s appraisal waivers. On its version, a loan can be considered without an appraisal if it’s a purchase or no cash-out refinance.

The loan must secure a single-family one-unit property that is either owner-occupied or second home with a total LTV of less than or equal to 80%.

The decision of Fannie and Freddie to veer away from appraisals is a welcome development for borrowers of conventional loans conforming to their standards.

While the appraisal waivers don’t apply to all loans, at least, some mortgage borrowers get relief from paying related fees and waiting for property valuations to finish for their loans to close.

As new technologies are unfolding and guidelines are loosening, it’s only a matter of time before lenders become creative with mortgage products that cater to all sorts of borrowers, stated income loans included.

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What Is a Mortgage Rate Lock, Today’s Mortgage Borrowers Ask

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Interest rate

Before finding out when’s the best time to lock, you might want to understand what a mortgage rate lock is all about. It’s a practice among mortgage borrowers, be it refinancers or homebuyers, ensuring they’ll get their desired rate even when mortgage rates head higher.

If you are keen on keeping your mortgage costs at realistic levels by keeping your rate low, getting a mortgage rate lock might be your best option. So, let’s unlock the important points surrounding the mortgage rate lock.

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A Mortgage Rate Lock Is

Mortgage rate locks protect borrowers against one of the most variable, ever-changing elements in the world of mortgages: interest rates.

By doing a rate lock, you get a guarantee from a lender that it will give you a certain interest rate and corresponding points for a certain period. This stipulated period, or rate lock period, can be as short as 30 days or as long as 60 days.

In exchange for “reserving” this combination of rate and points, you pay the lender a fee. The rule of thumb is for you to hold onto your rate until such time as you close the loan.

Do remember that the longer the rate lock period, the higher the fee. When you extend this period or when it expires, you have to pay an extension fee.

More recently, Wells Fargo was in the news over extension fees that it charged clients, totaling $98 million. The bank apparently charged mortgage borrowers when it was not their fault that the rate lock expired because of delays from their end, according to CNN Money.

Wells Fargo did promise to refund the mortgage rate lock extension fees it collected from September 2013 to February 2017 as per the report.

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Lock or Float

Rates move many times in a day. No one can predict rates but projections and preparations can be made.

That’s why mortgage experts advise their clients to lock (or float) their rate pending important events that could influence rates to go higher. Examples of these events are meetings of the Federal Reserve’s Federal Open Market Committee that could herald rate hikes, and economic indicators such as job reports and consumer price index.

Locking in on a rate is basically for your peace of mind, especially if rates are trending upward. But if you think rates are bound to go lower, as they are historically now, and are savvy about markets, you can choose to float your rate.

Is It Now or Later

Before you lock in on a rate, be sure you have gone around and compared a number of lenders’ offers. If you have found your desired rate, lock it and time it with your estimated closing date.

Just what if rates will drop tomorrow? Well, you can probably do a let’s-wait-and-see stance. But this could be complicated if you are moving along a mortgage schedule and rates are fluctuating by the day.

You can also consider paying discount points to lower your rate. A point is equivalent to one percent of your loan amount. While you can get a lower rate, your mortgage costs will go up.

Mortgage rates are volatile creatures, nothing can change that. But you can pin one down while you wait for your mortgage to close. Just make sure it makes sense, number-wise.

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The Role of Bank Statements in Successfully Getting a Mortgage

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Whether you are applying for a stated income or a traditional mortgage, your loan officer could ask for your bank statements. These documents are used to verify and document your income. Lenders are required to do their due diligence on your ability to repay your debt and your bank statements and other asset documentation will prove that.

Because most loans are underwritten via an automated platform, e.g. Desktop Underwriter®, the need for bank statements may crop up during underwriting. Nontraditional loans such as bank statement loans are based off on the flow of money into bank accounts so that they go hand in hand with the loan application.

Find out the role of bank statements in applying for mortgages. Find a lender today.

Bank Statements and the Mortgage Process

When making loans, lenders must ensure that the borrower has the capacity to pay the debt to be incurred. They would look into the income of the borrower to make this determination.

Moreover, lenders need to check if the borrower has enough assets (readily convertible to cash) that can cover the down payment, closing costs, and reserve requirements.

Bank statements can cover both for the lenders in their quest to track the assets and income of the borrower. They are also helpful in verifying the identity of the borrower and the information as it pertains to asset accounts set forth on his/her mortgage application.

Usually, lenders look at deposits that fall outside of the declared income source of the borrower, e.g. an unexplained large deposit used for down payment. Or it could be recurring withdrawals that pertain to an undeclared debt obligation.

Mortgage borrowers like you can present your personal bank statements. If you are self-employed or are a majority owner of a business, both personal and business bank statements may be required.

Bank Statement Loans

These loans perfectly sum up the role of bank statements when applying for mortgages.

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Niche lenders who make these mortgages usually require personal/business bank statements for 12 consecutive months, thus dubbed as 12-month bank statement loans.

These lenders recognize the struggle of self-employed borrowers to have their real income verified because of write-offs on their federal tax returns. Interestingly, some bank statement loans don’t require tax returns and their related tax transcripts.

What’s important for the lenders is a reliable, steady cash flow that they will use to calculate income. To arrive at income, lenders take the average deposits during the given period, net of debits and withdrawals.

They will then take into account recurring monthly expenses to get average monthly income. From the average monthly income and recurring monthly expenses, they can come up with the debt-to-income ratio of the borrower.

Indeed, good credit, liquid reserves, and provable income via bank statements are the main ingredients to a successful bank statement loan.

As with any other loan, expect to meet loan-to-value ratios, down payment requirements and asset reserves as well.

Don’t estimate the power of bank statements especially if you have difficulty getting financing under standard mortgage programs. You can always look at alternative or nontraditional loan products like bank statement loans.

Happy shopping!

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