Maximizing borrowing power can be difficult for self-employed borrowers but with alternative documentation programs you don’t need to settle for less. Our lenders can use your bank statements or a profit-and-loss statement to determine a borrower’s monthly income. In this guide we will discuss how lenders calculate income using alternative documents and other eligibility information.
Bank Statement Loans
When using the bank statement program, borrowers have the option of providing the most recent 12 or 24 months of personal or business statements rather than providing their tax returns. Their income will then be a percentage of their average monthly deposits calculated with the following formula:
(average monthly deposits) X (expense factor) = Qualifying income
The expense factor depends on whether you submit personal or business bank statements. Lenders will use a higher expense factor for personal statements and many will use 100%. When using business statements, lenders will consider what sort of business you and the number of people you employ. Generally, service businesses have a higher expense factor than product sellers and fewer employees means a lower expense factor. Expense factors typically range from 50-90% or can be attested to by a tax preparer.
P&L Loans
Another option for self-employed borrowers is using a 12 month profit-and-loss statement to verify their income. The borrower’s qualifying income will be the monthly average of the business’s net operating income for the last 12 months. The profit-and-loss statement must be prepared by Certified Public Accountant (CPA), an IRS Enrolled Agent (EA) or a CTEC registered tax preparer.
Eligibility Information
Many lenders offer alternative income loans so their eligibility guidelines vary but one rule that applies almost universally is that the business must be operating for at least 2 years.
Credit Score
Most lenders require a minimum credit score of 620 for the bank statement and P&L programs. However there are bank statement programs available to borrowers with credit scores as low as 550.
Down Payment
The minimum down payment will depend on the borrower’s credit score and their income type.
Using the bank statement program, borrowers with high credit scores purchasing a primary or second home can make a down payment as low as 10% or 20% when purchasing an investment property. With a weaker credit score, borrowers may need to make a down payment of 25-35%.
Using a profit-and-loss statement to document income will generally require a down payment of 20-25%.
Loan-to-Value (Refinance)
The maximum loan-to-value (LTV) for a home refinance will depend on the borrower’s credit score and their income type.
Using the bank statement program, borrowers with high credit scores purchasing a primary or second home can make a down payment as low as 10% or 20% when purchasing an investment property. With a weaker credit score, borrowers may need to make a down payment of 25-35%.
Using a profit-and-loss statement to document income will generally require a down payment of 20-25%.
Debt-to-Income Ratio (DTI)
Borrowers with higher credit scores can generally have higher DTIs than borrowers with lower credit. For higher credit borrowers, the maximum allowable DTI is typically 50% while borrowers with lower credit can generally only go up to 43%.
FAQ
Q: What if my business is co-owned?
A: If you use business bank statements or a P&L to document your income, then your qualifying income will be based on your share of the business. For example, if you own 50% of the business then the income resulting from the calculations described above will be cut in half.
Q: What if my spouse is not self-employed?
A: Most lenders can combine traditional income types and alternative documentation