A bank statement loan refinance is an excellent option for self-employed individuals to refinance their mortgage. With this kind of refinance, you can submit your bank statements instead of tax returns in order to verify income. Small business owners, independent contractors, freelancers, and other self-employed individuals find bank statement programs beneficial to refinance, whether it be rate/term or cash-out refinances.
Bank statement loans were most notably created for the explicit purpose of helping self-employed individuals qualify for a mortgage loan. With this loan, you are required to submit bank statements instead of submitting tax returns. This way, the lender can view your bank statements and history instead of reviewing your reported income, as usually revealed on a W-2, to prove the borrower can repay the loan.
Refinancing a mortgage as a self-employed homeowner
Historically, it was difficult for self-employed homeowners to refinance their mortgages. Those who are consultants, freelancers, doctors, lawyers, real estate agents, and other self-employed individuals have had more roadblocks to getting conventional or FHA mortgage loans in the past. Mainly because it is tricky to document every write-off or income and the fact that it’s often harder for non-W2 wage earners to qualify for a mortgage.
These hurdles have also limited these individuals from being able to access funds to conduct renovations, lower their rates, or consolidate debt. It was hard for those who earn seasonal income or are independent contractors to get approved for a mortgage because of earning inconsistency and the lack of traditional forms of financial documentation. Additionally, many who are currently self-employed may not have been self-employed when they started their current mortgages.
When applying for a bank statement loan, the lender will review your monthly personal or business bank deposit statements from at least the last one to two years to determine if you have sufficient income to repay the loan with. One thing to be prepared for is for there to potentially be a higher rate and down payment necessary to secure the loan, but this is rarely a sizable difference. This is because these loans involve more risk for lenders, therefore, requiring more than a conventional loan might.
We will discuss your options if you are among the increasing population of self-employed Americans who can benefit from alternative lending programs like bank statement loan refinances. While not every lender offers bank statement loans, they have increasingly become more popular. It’s also possible for those who weren’t self-employed when first taking out their loan to refinance to a bank statement loan if they are now self-employed.
Self-employed mortgage refinance requirements
It’s essential to shop around first and not give up if turned down by a lender. This is because eligibility requirements are not always the same from lender to lender. Since the requirements may vary, you should be prepared to be asked for the following:
Provide one to two years’ worth of personal or business bank statements
Must have two years of self-employment history
A decent credit score (often as low as 575) that will depend on your lender’s requirements
Proof that you have enough funds or liquidity to cover several months of mortgage payments
Proof of assets or investments
Provide your business license
Your accountant, tax return preparer, or lawyer must provide a letter that confirms you file taxes as an independent contractor and your business expenses.
Bank statement loan refinance benefits
Suppose you’ve left the traditional workforce behind to forge your way as a self-employed contractor. In that case, you could refinance your existing mortgage into a bank statement loan if it proves beneficial to you.
There are many great reasons to seek out this type of loan, especially if you meet the eligibility criteria. However, the most notable benefits associated with bank statement loans are:
No W-2s, paystubs, or tax returns are needed to apply.
You may be allowed to have a higher debt-to-income ratio than those required for conventional loans. Being a business owner or entrepreneur comes with many expenses that need to be managed and maintained, so your DTI may look a bit higher than the average borrower’s. This is why it’s typical for most bank statement loan lenders to accept a DTI as high as 50.49%.
This loan provides the borrower with a little more flexibility. You could use the loan on a primary residence, vacation, second home, and rental and investment properties.
Available loan limit of up to $3,000,000 tends to be higher than conventional loan limits. Additionally, for those refinancing, you could access up to 85% of your loan-to-value with a cash-out and up to 90% of your loan-to-value with a rate and term refinance.
Potential bank statement refinancing disadvantages
An important detail to keep in mind is that, even if you’ve been self-employed for the last two years, you may still be eligible for a conventional loan if your income has been steady and predictable. So a bank statement loan may not be your only, or even best, option, so be sure to explore every loan avenue before making your mind up.
Reviewing all of your options is important. Mainly because every loan option comes with disadvantages that accompany the loan type. So take your time and choose the loan that will fit your financial situation and future goals the best.
For instance, you may find that the bank statement loan comes with a higher interest rate than you could lock into with a conventional loan. Not all lenders offer bank statement loans, so you may have a more challenging time finding the right lender. Additionally, you may be required to put down a larger down payment on the property since these loans carry a higher risk for lenders than conventional loan types.
How does a bank statement refinance work?
Lenders will require that you have enough equity built into your existing home to consider you eligible for a bank statement refinance. Depending on your lender and their qualification requirements, the refinance process will be very similar to applying for a regular bank statement loan.
When applying, you need to show your business license and prove that you’ve been self-employed for at least two years. You’ll also need to provide 12 to 14 months of bank statements. The lender will review one to two years of bank statements from your personal or business account. This is done so that the lender can verify your income and determine your ability to repay the loan since you most likely don’t meet the ability-to-pay requirements associated with conventional loan types.
You’ll also need to meet the debt-to-income ratio of 50% or less to qualify and the minimum credit score required by the lender. Don’t forget to request a letter from your accountant that confirms you file taxes as an independent contractor and your business expenses. Remember that lenders might have different requirements, so be sure to review the documentation requirements beforehand to know what you’ll need to apply.
If you are refinancing an existing bank statement loan, the application process might be slightly easier than someone trying to refinance a conventional loan into a bank statement loan.
Make sure that whatever lender you decide to go with has your best interest as the top priority. That’s why shopping around is so important. Here at American Financing, we are proud to have a team of experienced salary-based mortgage consultants ready to explain your options to you and work one-on-one with you to meet your goals.
So, if you’re ready to start the application process, we recommend that you start by reaching out to one of our salary-based mortgage consultants, who can walk you step-by-step through the process and answer any questions you may have. To find out about your loan options, call (866) 885-1079 or schedule an appointment. You can also refer to our self-employed mortgage guide to learn more about what to expect.