What is a ‘Bank Statement’ Loan?

Written By: David Reed

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At the height of the real estate boom in the mid-2000s, buyers who otherwise wouldnt qualify for a traditional loan could buy a house with very little documentation. Because of this ease of qualifying, real estate markets heated up, driving up home prices. Buyers would essentially flip a property after just a few months making money on the sale.

Soon thereafter, the bubble burst. There were no more people to issue such loans to. In turn, that meant that buyers who intended to flip a property for a short term purchase discovered the home they intended to sell couldnt find any buyers. Because they couldnt qualify for a traditional, verifiable loan, they began to default. And it all went downhill from there.

The CFPB stepped in and put an end to all this. New guidelines were introduced to stem the tide of foreclosures in an attempt to get the economy back on track. One of these new guidelines was the ability to repay, or ATR. This guideline required lenders to verify and document income from applicants and prove they had enough monthly income to pay back the new mortgage. Essentially, the mortgage industry returned to the good old days where lenders verified pretty much everything.

As the industry began to settle down and lenders returned to traditional underwriting, a new program was introduced which didnt directly verify monthly income but did so in another way. Instead of paycheck stubs or income tax returns, lenders would verify income by looking at bank statements over the past 12-24 months. Why? Bank statements, either personal or business, would show deposits being made. Lenders could determine how much someone made each month by adding up all the deposits.

Such loan programs were aimed primarily at self-employed borrowers. Many self-employed borrowers could have somewhat complicated tax returns. Sole-proprietors, LLCs, Trusts and Corporations all filed tax returns. Throw in things like depreciation, expenses and third-party income and one could see how much paperwork would actually be needed. Instead of these various income tax returns, lenders simply looked at bank statements for third-party verification of income.

These loans arent exactly no-doc or low-doc programs but theyre very close to it. Minimum credit score requirements are typically higher compared to a fully documented loan and more down payment will be needed at the settlement table. The program is not only more convenient for the buyers but also require less overhead when evaluating a loan program submitted by someone who is self-employed or >



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