Refinancing a house can open up a lot of opportunities. But if you don’t have the traditional documentation most lenders require to get approved for a mortgage, your experience can quickly turn sour.
That’s where bank statement home loans come in. These loans rely on your bank account records, rather than tax returns, to demonstrate your financial stability and ability to repay the mortgage. By carefully reviewing your bank statements, lenders can gain insight into your income, savings and cash flow. Doing so makes it possible for them to approve a home loan, even if you don’t have a steady 9-5 job or consistent earnings on paper.
Read on to discover how bank statement loans work and what to consider when evaluating if they’re a good fit for you.
How Bank Statements Can Help You Refi a House
If you opt for a bank statement loan, you don’t need to provide the typical financial documents required for a mortgage, such as W-2s and tax returns. Instead, your lender will focus on your bank statements to assess your income and ability to afford the mortgage payments. This type of loan is particularly beneficial if you are self-employed or have variable income sources, which might make it challenging to qualify for a conventional mortgage.
Why Do Lenders Need Your Bank Statements?
Mortgage lenders require your bank statements for a few important reasons. They primarily want to assess your financial stability and determine if you have a reliable income to repay the loan. By examining your bank statements, lenders can gain insights into your spending habits, income sources and overall financial health. This information helps them decide whether to approve your loan application and determine the terms of your mortgage.
Lenders also review bank statements to confirm that you have sufficient funds to cover the costs and expenses associated with refinancing a home. They want to ensure you are not relying on borrowed money or risky financial sources, which could put your ability to repay the loan at risk.
If you don’t have the necessary proof of income documentation to refinance your mortgage required by other lenders, consider Angel Oak Mortgage Solution. They specialize in non-QM loans and offer specific programs for self-employed and non-traditional borrowers. With their cash-out and rate and term refinance through their bank statement program, you can refinance your home even without the traditional requirements. Fill out this online questionnaire to contact a licensed mortgage expert from the Angel Oak team.
What Mortgage Lenders Look for in Bank Statements
When analyzing bank statements, mortgage lenders want to see positive account balances, consistent cash flow and few or no overdrafts.
Positive Account Balance
Lenders want to see that you have a healthy balance in your bank account before approving your mortgage application. It demonstrates you can responsibly manage your finances.
Consistent Cash Flow
Mortgage lenders also focus on consistent cash flow to confirm that you have a stable monthly income to cover your mortgage payments. Remember to keep your income sources stable and transparent during the application process to build trust with your lender.
Little to No Overdrafts
Overdrafts can raise red flags for mortgage lenders, who might see this as a sign of poor financial management. Minimize or avoid overdrafts to present a solid financial profile to your potential lender. It could also increase your chances of getting approved for a mortgage.
When the Money was Deposited
The timing of deposits is another factor mortgage lenders evaluate. They may want to know when the funds were deposited into your account, as this can help them determine if the money has been in your possession long enough to be considered “seasoned” and genuinely yours. Be prepared to provide explanations and documentation for significant deposits or transfers.
Can You Refi a House with Bank Statements?
As aforementioned, it’s possible to refinance a house with bank statements. These loans are specifically designed for borrowers who can’t provide traditional income documentation, such as W-2s and pay stubs.
It’s essential to present a stable and healthy financial picture to maximize your chances of approval. Your bank statements should show regular income deposits, consistent savings and minimal overdrafts or unusual transactions.
Remember that each lender’s requirements may vary, and some may have stricter guidelines than others. It’s important to research different mortgage lenders and their specific bank statement mortgage programs to find the right fit for your financial situation.
The Pros and Cons of Refinancing a House with Bank Statements
Here are some benefits and drawbacks to keep in mind when deciding if a bank statement loan makes financial sense.
Pros:
- Easier approval process: Instead of providing W-2s and tax returns, you can prove your income using bank statements. This can simplify the mortgage approval process and help you secure financing.
- Flexibility for credit score: With a bank statement mortgage, you might be eligible for a loan even if your credit score is lower than required for traditional mortgages. Lenders tend to focus more on the consistency of your income rather than your credit score.
- Business expense considerations: If you are self-employed, you can use bank statement loans to demonstrate your true income even with business expenses factored in. Many business deductions can reduce your taxable income, making qualifying for a mortgage with a traditional lender difficult.
Cons:
- Higher interest rates: Due to the perceived increase in risk associated with bank statement loans, lenders may charge a higher interest rate. This could lead to higher monthly payments and potentially a more costly home loan over time.
- Limited lender options: Not all mortgage lenders offer bank statement loans, so you may have fewer options to choose from. Finding a lender willing to provide this type of loan can also be more time-consuming.
- Stricter loan requirements: While bank statement loans are designed to accommodate unconventional income situations, there may still be strict requirements regarding your income stability and debt-to-income (DTI) ratio. If you can’t meet these conditions, you might be denied financing.
The Process: Refinancing a House with Bank Statements
Here are some steps to follow when using your bank statements for your mortgage application:
- Step 1: Gather two to three months of recent bank statements from all accounts holding funds you’ll be using for the home purchase.
- Step 2: Review your bank statements thoroughly and identify any transactions that may need clarification or further explanation.
- Step 3: Prepare a financial summary that highlights your income, expenses and other relevant information to support your mortgage application.
- Step 4: Be prepared to provide evidence of any large deposits, such as gift letters for down payment assistance or documentation for selling an asset.
- Step 5: Ensure all statements are clear and legible, and include your full name and account number to facilitate verification.
You can boost your approval odds by following these steps and submitting accurate, complete bank statements.
Tips for a Successful Home Refinance Using Bank Statements
When you’re ready to formally apply, remember these tips to help streamline the process.
Preparing Your Bank Statements for Mortgage Application
As a borrower, especially if you’re a self-employed individual, ensure that your bank statements reflect consistent income and responsible spending habits. Mortgage lenders typically review two months of recent bank statements during your home loan application process.
To prepare your bank statements:
- Consolidate your accounts into one primary account that shows your income and expenses.
- Clearly label any irregular deposits, such as gifts or bonuses, with proper documentation.
- Ensure account balances match your other financial statements, like tax returns.
Maintaining a good credit score is also vital to increase your chances of getting approved. Regularly review your credit report, correct any errors and work on improving your score to qualify for more favorable loan terms.
What to Avoid When Applying for a Mortgage
Mortgage lenders scrutinize your bank statements to assess your financial health and risk level. To improve your prospects for a successful mortgage application, avoid the following:
- Large, unexplained deposits: Sudden large deposits can raise suspicion about the legitimacy of your income. Provide a paper trail for these transactions to clarify their sources.
- Frequent overdrafts: Overdrafts in your account may suggest a pattern of financial irresponsibility. Keep a healthy cushion of funds in your account to avoid such occurrences.
- Large transfers between accounts: Frequent transfers between accounts can make it difficult for lenders to determine your actual income and expenses. Try to limit these transactions when possible.
- High debt-to-income ratio: A high debt-to-income ratio can negatively impact your mortgage prospects. Aim to pay down debt and maintain a healthy balance between your income and expenses.
By adhering to these tips and ensuring your bank statements paint a positive picture of your financial situation, you can increase your chances of securing a bank statement loan.
