Non-qualified mortgages (non-QM) provide flexible financing options for borrowers who fall outside the strict underwriting boxes of conventional loans. Non-QM lenders offer specialized programs to qualify self-employed borrowers using alternative documentation like bank statements. Known as bank statement mortgages, these programs simplify the borrower qualification process.

Challenges of Income Documentation for the Self-Employed

Self-employed individuals often have irregular income streams that don’t fit neatly into the forms and documentation required for a standard qualified mortgage. Seasonal dips and spikes in income make it difficult to establish a clear earnings history, especially when lenders ask for two years of tax returns. Non-QM loans serve many self-employed borrowers, so developing flexible qualification methods is essential.

How Bank Statement Loans Work

Rather than verifying income solely based on tax documents, bank statement programs allow borrowers to use personal and/or business bank statement averages to qualify. Lenders review deposits, exclude non-income transactions like transfers, and calculate a monthly average. This averaged amount becomes the basis for underwriting. Lenders also verify borrowers’ personal assets to evaluate if adequate income exists to continue making loan payments.

Speed and Flexibility

By reducing paperwork and documentation requirements, bank statement mortgages streamline qualification for self-employed borrowers. Applicants can qualify with just 12-24 months of bank statement history rather than two years of tax returns. This provides faster access to financing and more flexible underwriting. Bank statements also capture current cash flow vs. past earnings on older tax forms.

Risk Factors and Verification Needs

While bank statements simplify documentation, they also come with increased fraud risks if borrowers falsify statements to inflate income. Lenders must implement strong auditing and verification procedures, like requiring online statements direct from the bank. Unrealistic deposit patterns or amounts may prompt further scrutiny. And bank statement loans often have higher interest rates and down payment requirements to offset the risk. Lenders still need to assess borrowers globally, looking at credit profiles and debt-to-income alongside stated income.

Conclusion

Bank statement mortgage programs allow non-QM lenders to qualify self-employed borrowers using verified bank statement deposits rather than traditional income documentation. This streamlines access to financing for those with irregular income streams. However, these loans require careful due diligence to mitigate fraud risks. Work with a trusted non-QM loan officer to see if a bank statement program suits your particular situation and financial goals. While not a fit for all, these loans fill a key niche within the non-QM space.