What every broker should know about bank statement loans
Over the past few years, bank statement loans have been the product of choice for most non-QM originators. But despite all the attention they have received, these loans have one of the lowest interest rates, if not the lowest of any non-QM product. I would say there are two reasons for this. The first is that there continues to be some confusion over how to calculate income. Second, our industry has been slow to understand who today’s independent client really is and how diverse and complex their earnings can be.
There is also a strong link between the Internet and entrepreneurship. Today, you don’t have to go to Wharton to start a business and be an entrepreneur, or need a registration deal to create an overnight sensation. If you’re talented, you can put your music on SoundCloud and Spotify, get a million followers, and earn a million, all on your own.
When you stop and think about it, the bank statement loan is a product for the times we live in. It creates funding for people who are willing to take a chance on themselves. Most of these people are financially responsible, but in many cases they have been sidelined because they do not fit in the box.
So why the confusion?
On the one hand, non-QM is still a relatively new concept for many loan originators. In the aftermath of the mortgage crisis, most of their business consisted of FHA, or GSE, W-2 DU / LP loans. There was a simple formula for creating these loans: take a few years of W-2, throw them into the DU or LP rotation cycle and you are up to your decision.
A successful bank statement loan requires the active commitment of the loan officer and a solid partnership with the wholesaler. Wholesalers with the best origination history in this category spend a lot of time and training explaining the nuances of calculating income to their partners, so there are fewer surprises and disappointments. These wholesalers should also offer real-time technology and support to identify possible errors and / or problems early enough in the process to save loans.
Why are we going to these lengths? First, because we want the loan; and second, because we know that every chord is either a relationship builder … or a killer. The last thing everyone wants is a situation where your referral partner’s best client is in the middle of the escrow and someone missed the deposit on page 73 of the bank statement and the deal is Refused.
The diverse income streams of today’s freelance borrowers are the main reason bank statement lending is so difficult. It’s not uncommon for many prospects to have multiple sources of income – think of a freelance designer, who works for Uber part-time and also has income from renting Airbnb. It is certainly not the independent borrower around 2000. In many cases, these borrowers work and live in the same personal account from which we earn income. So what you have are multiple sources of income and personal expenses, like those of Trader Joe and Nordstrom, mixed with professional expenses. This is often where things get muddy.
It takes skills and experience to solve these problems and calculate qualifying income. But there are also common defaults that can derail or at least delay bank statement loan approvals:
1. Incorrect analysis of bank statements: Income deposits used for qualification must be “related” income generated by the business (for services rendered). Deposits that result from “line of credit advances”, “repayments” or “general” account transfers may mean that the borrower is simply transferring money in order to qualify for the loan. Therefore, these deposits are generally not taken into account in calculating income. For example, if a line of credit advance of $ 100,000 is recorded as income, it will generate additional income of $ 8,333 / month. When this “income” is removed, it could lower the DTI from 43% qualifying to 60% disqualification.
2. Incorrect job data on 1003: Business entity (job) on 1003 does not match bank statement entity (business name). At the very least, this will result in additional subscription conditions. But often this default is a sign that there are other red flags / disqualifications that will prevent the loan from closing.
3. Invalid CPA: When a CPA / tax preparer letter validates the self-employment and expense factors, due diligence is performed on the CPA / tax preparer to confirm that the person signing the letter has the authority to do so. Often, the preparer cannot be found or his license is suspended or inactive.
These are just a few of the red flags that a loan originator should look for with bank statement loans. Good wholesale partners will help you find and resolve these and other issues early on in the origination process, before they become deal breakers. With the right information and the right partner, bank statement loans don’t have to be a daunting prospect anymore – they can be a growing revenue stream and relationship factor for any store.