An In-Depth Look at the Bank Statement Loan

The Bank Statement Loan has been the number one alternative for business owners to qualify for a mortgage.

Why is that? 

Part of the reason is that Business Owners do not conform to traditional or conventional guidelines.

Traditional Lenders use standards that do not apply to the Business Owner, and this is why, even though Business Owners are essential to our economy, they get the short shrift when applying for a mortgage. You can read more about why this is so here. 

This never made sense to me.

According to the U.S. Small Business Administration (SBA), small businesses (defined as firms with fewer than 500 employees) account for around 64 percent of net new private-sector jobs. They play a crucial role in creating employment opportunities and driving economic growth.

My dad had one of these businesses. He had a business manufacturing men’s clothing, which had been started by my grandfather. He employed 150 people on the factory floor and had 5 retail stores, employing an additional 60 people between administration and sales personnel.

I grew up playing on the factory floor, got sales lessons from the best salesman my dad had and learned accounting from the highly paid consultants he employed.

I never understood how it is possible that such a huge an important segment of our economy is systematically disregarded by major conventional lenders.

As a Business Owner myself, I have experienced first hand this challenge, and this is why I have made it my mission to provide real estate financing to this huge and important segment of our economy.

In a previous article and blog post, I reviewed the Profit & Loss Method of qualifying for a mortgage. 

This method allows you to qualify for a Mortgage using an un-audited Profit & Loss Statement. This is a powerful and simple way to qualify. It saves you about two weeks when compared to other methods and cuts down considerably on the paperwork. You can find out more about how to qualify using a P&L here. 

The challenge with the P&L Method is that your company needs to be established, your corporate set up needs to be up to date, your finances have to be professionally managed, and your CPA, Tax Preparer or Enrolled Agent has to be a business accounting professional.  

What if you are not there yet? What if you have a profitable business that does generate cash flow but your set up is a bit informal? Maybe you have not incorporated yet, or your accounting is not up to date, or your CPA only helps you with the basics, however your business is sound, your income is consistent, stable or increasing, you have a track record of at least two years in business and you have been in your particular industry for 5 years or longer.

Then the Bank Statement Method of qualifying might be just what you need to qualify for a mortgage!

This method allows you to buy either a Primary Residence or an Investment Property.

The beauty of this method is you can use both Personal & Business Bank Statements, and you can even combine the two. For example, someone pays you through Zelle and that only shows up on your personal account.

You can use as many accounts, personal or business, as you desire. I remember one time we had 6 accounts for one of our clients!

Normally you need to show 2 years worth of bank statements to the lender. Sometimes they will allow 12 months, but they charge a premium for that.

When analyzing bank statements, the lender is looking for the volume of cash flow that goes through your business. They are not comparing deposits versus withdrawals, they are looking at the amount of income that your business generates.

Analyzing these bank statements used to be time and resource consuming, (imagine:  4 accounts x 24 months = 96 bank statements!). Now they are fed into an Artificial Intelligence system, and in less than 30 minutes all the transactions are processed. Based on your deposits, the system will calculate what is your likely yearly income 

Then, depending on how many employees you have, whether you rent an office or work from home, whether you sell a product or deliver a service, the lender will deduct a percentage from your yearly income, anywhere between 20% at a minimum to 50% maximum to account for your overhead.

The result will be divided by 12 and this is how the lender calculates your income to qualify you for the mortgage!

Things to keep in mind:

This Method can become cumbersome if your deposits are not consistent; the system will calculate your average deposits and anything over 20% of this average needs to be explained with a short letter—a Letter of Explanation or “LOE.”

If you have NSFs (Non Sufficient Funds charges), lenders don't like that; they have a maximum of about 6 per year per account, and you have to explain every single one of them through a Letter of Explanation.

Depending on the complexity of your business, writing all these LOEs could become time-consuming.

However, the beauty of the Bank Statement Method of qualifying is that it allows you to use your cash flow! And most independent businesses have a healthy cash flow! 

In other words, the one thing that traditional lenders would give no importance to, your cash flow, is the one thing that could qualify you using the Bank Statement Loan! 

When you compare the interest rates for these programs, they are about 0.5% to 1.5% higher than the government subsidized Fannie Mae or Freddy Mac loans (which you have to qualify for using tax returns to demonstrate your income).  

But for business owners, using the Bank Statement or Profit & Loss Methods can often be the difference between getting a mortgage or not getting one at all.  

Having said that—as a matter of routine, we always check first whether or not the Business Owner is able to qualify using the more stringent Freddy Mac or Fannie Mae guidelines (using tax returns) in order to get them the absolute cheapest rate we can possibly get.

I am happy to say that we routinely outperform other mortgage brokerages by getting our customers the lowest rates they could qualify for in both the “conventional” loans and the specialized business owners loans.

If you are thinking about buying a piece of property or strategically refinancing, it is useful to pre-flight your specific scenario. Sometimes it takes a bit of time to iron out the details in the preparation phase to ensure a smooth loan application process when you are ready to make your move. 

If you would like to see what options and numbers are available in your situation, feel free to self-schedule an appointment here.