Bank Statement Loans for Self-Employed Borrowers in California

Bank statement loans have become increasingly popular in California, partly due to a rise in the number of self-employed and “gig economy” workers.

While they’re not limited to self-employed home buyers, bank statement loans tend to work well for this group due to a unique income verification process.

This guide explains the key features of bank statement loans, how they differ from traditional mortgages, and how self-employed workers in California can benefit from using them.

1. A bank statement loan is a type of mortgage that allows borrowers to qualify based on their bank statements, instead of using tax returns.
2. Bank statement loans provide an alternate path to financing for self-employed borrowers and those with non-traditional income sources.
3. Due to increased risk for lenders, these loans often come with higher interest rates and require larger down payments than conventional loans.
4. Borrowers can often qualify with a debt-to-income (DTI) ratio of up to 55%, which is more flexible than many traditional mortgage programs.
5. This option can benefit self-employed individuals in California who might not qualify for a conventional loan due to income reporting limits on tax returns.

Bank Statement Loan vs. Traditional Mortgage

Let’s start by reviewing the key differences between bank statement loans and the more common conventional mortgage. Borrowers need to understand these differences to choose the right loan for their situation.

Traditional Mortgage Loans

A traditional or “conventional” mortgage is a home loan that is not insured or guaranteed by the government. This means the lender (or investor) bears all of the risk associated with the loan, unless it is sold into the secondary mortgage market.

Because of this, borrowers must meet stricter eligibility requirements than those used for government-backed loans.

Traditional mortgages generally require a steady income, strong credit score, and a specific debt-to-income ratio. Lenders review a wide variety of documents to assess the borrower’s creditworthiness and ability to repay the loan.

Bank Statement Loans

A bank statement home loan is a unique type of mortgage product that allows borrowers to qualify for financing based on their bank statements, instead of tax returns. This can be a helpful option for self-employed borrowers, or those who have other income sources not reflected in their tax returns.

Bank statement loans focus on the borrower’s overall cash flow, allowing for more flexible qualification criteria. Self-employed individuals in California, or those with variable income, may find it easier to qualify for this type of loan.

Differences Between Them

Bank statement loans and traditional mortgages differ mainly in their approach to income verification. Traditional mortgages require a lot of documentation like pay stubs, tax returns, and W-2 forms.

In contrast, bank statement loans cater to individuals with non-traditional income sources, like self-employed individuals, by using bank statements as proof of income.

Key Features of the Bank Statement Loan

So how does a bank statement loan actually work? Here are the key features these products offer:

• Instead of using tax returns, the lender will review 12 to 24 months of bank statements to determine how much you might be able to borrow.
• In some cases, personal bank statements can be used for mortgage underwriting purposes, but only if the business and personal banking is within the same account.
• If a self-employed borrower has a separate bank account for the business, that account will be used for income verification and underwriting.
• Interest-only mortgage loan options are available as well. These products allow the borrower to pay only the interest (and no principal) for a certain period of time, resulting in a lower payment.
• With a bank statement loan in California, the borrower’s total debt-to-income ratio can be as high as 55%. That’s higher than many other mortgage programs. So it’s a flexible loan product.
• Bank statement loans can be a good alternative for self-employed borrowers who don’t have enough income reflected within their tax returns to qualify for the financing they need.
• The maximum loan-to-value (LTV) ratio is 85% in most cases, up to a loan amount of $1 million.
• For larger mortgage loans of up to $2.5 million, the maximum LTV is usually set at 70%.

An Alternative for Self-Employed Borrowers

Are you currently self-employed? Do you plan to buy or refinance a home in California sometime soon?

If so, you should know about the benefits of bank statement loans in California. This is a unique financing option that could help a lot of self-employed borrowers in the state.

With a “regular” conventional mortgage loan, lenders often focus heavily on tax-related documents when verifying income. Tax returns are usually at the top of the list.

But for a lot of self-employed borrowers in California, the tax records alone do not show enough income for mortgage qualification purposes.

All too often, this creates a situation where responsible borrowers with steady income cannot qualify for a mortgage loan, simply because of the standard documentation requirements.

That’s where the bank statement loans prove useful.

These products are well suited for self-employed home buyers in California with bank records that reflect their true income, over the last year or two.

Basic Qualifications for California Borrowers

To qualify for a bank statement home loan, borrowers typically need to provide 12 to 24 months of bank statements. The lender will then review those statements to determine the borrower’s income and expenses. The bank statements are also used to calculate the maximum loan amount.

As you might have guessed, bank statement home loans in California typically have higher interest rates than traditional mortgage products. That’s because the lender takes on more risk when they make a loan that’s primarily based on bank statements.

But despite the higher rate, bank statement loans can be a good option for borrowers who are unable to qualify for a traditional mortgage due to employment or income reasons.

Factors to Consider When Choosing

When deciding between a traditional mortgage or bank statement loan in California, borrowers should consider their unique financial situation, income stability, and long-term goals.

Here are some key factors to consider before choosing a product:

• Income Stability: Traditional mortgages favor borrowers with stable income streams, while bank statement loans accommodate individuals with non-traditional or variable income sources.
• Documentation: Bank statement loans simplify the application process with streamlined documentation, while traditional mortgages typically require more extensive income verification.
• Down Payments: Traditional / conventional mortgage loans often allow borrowers to make a down payment as low as 3% of the home value. Bank statement loans, on the other hand, tend to require larger down payments due to the higher level of risk involved.

Ready to Explore Your Financing Options?

Understanding the differences between traditional mortgages and bank statement loans is the first step to choosing the right product. So we encourage you to continue your research into these and other home-financing options.

If you’re planning to buy a home in California and have questions about your loan options, please feel free to contact our staff. Bridgepoint Funding serves borrowers all across California and offers a wide variety of loan options.