Low documentation loans took a back seat after the housing crisis. Lenders became leery of stated income loans. They chose to require full documentation for all loans, including home renovation loans. However, today, they are making a comeback. You may even find that you can fix up your home without fully documenting your income.
We help you discover just how this works below!
Great Credit Scores are a Must for a Renovation Loan
First, you need a great credit score. No lender will consider you for a low documentation loan if you are high risk. A great credit score shows the lender that you are financially responsible. Just what makes up a great credit score is subject to opinion, though. Each lender has their own preference. Because these lenders keep these loans on their own books, they can make up their own rules.
Using Personal and Business Bank Statements to Qualify
Self-employed borrowers often have personal and business bank statements that show their income. If you need to use a combination of both, you’ll also need to provide a Profit and Loss Statement. The lender uses the P&L to determine your income. Keep in mind, though, the expenses you claim must be normal for your industry. The lender will look closely at your expenses to make sure.
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Once the lender determines your average income, they’ll look at your personal and business bank statements. They want to see deposits equal to the amount of your average income. They often allow a fudge factor of 5% either way, but anything less than 5% of the amount will raise a red flag.
Using Only Personal Bank Accounts
If you don’t want to disclose your business bank account information, you may be eligible to use your personal accounts alone. You’ll have to be able to prove regular deposits from your business in order to qualify, though.
The lender may not need a P&L for this type of verification. Instead, they’ll look at your personal bank accounts and at the regularity of deposits. They’ll generally need 24 months of your bank statements in order to qualify you for the loan. They may also ask for a few months’ worth of your business bank statements in order to ensure that your business and personal accounts remain separate and that they don’t share funds.
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Using Only Business Bank Statements to Qualify
Lastly, you can use your business bank statements alone to qualify. You’ll need to provide a P&L for the lender to determine your regular income. They will then ensure that you have the appropriate deposits in your business bank account.
In this case, you’ll also need proof from a third party that you operate a business and that everything you state is true. This usually comes from your CPA or tax preparer. It helps give the lender reassurance that the money you provide them truly is yours.
Qualifying for the Renovation Loan
Once you prove you have the credit score and the income for the renovation loan, the rest is easy to satisfy. The lender will likely want to know what renovations you will make. This way they can get a true value of the home after renovations. This helps them determine if the loan is a favorable one for them to write.
Some lenders may require that you get approval for the renovations from them before you begin. This helps them determine what you use the funds on and how you proceed. For example, they want to prevent you from sinking money into your home that won’t provide a return on your investment. If they give you $20,000 and you use it to make cosmetic changes, it won’t have any effect on your value. However, if you renovate your kitchen or bathroom, you’ll likely see a return on your investment.
Lenders each have their own requirements when it comes to renovation loans with low documentation requirements. The good news is that they are out there! You will have to search for them and compare the offers from different lenders. Make sure you know all of the details before settling on a lender to make sure you get the best deal possible.