Everything You Need to Know About Non QM Bank Statement Loans

Non qm bank statement loans are becoming an increasingly popular option for borrowers who don’t qualify for conventional mortgages. As a mortgage broker, I often get asked “What exactly are non qm bank statement loans and how do they work?” In this comprehensive guide, I’ll explain everything you need to know about these unique home loans.

What is a Non QM Bank Statement Loan?

A non qm bank statement loan is a type of non-qualified mortgage (non qm) that allows borrowers to qualify based on bank statements rather than income documentation like pay stubs and W-2s.

With a conventional mortgage, lenders want to see stable, consistent income verified with documents like tax returns, pay stubs, and W-2s But self-employed borrowers or those with income from investments, bonuses, commissions or other sources often have irregular income that doesn’t meet conventional underwriting standards

Non qm bank statement loans offer more flexible guidelines by looking at assets and cash flow as verification instead of just income. For borrowers with multiple income streams or income that is difficult to document, these loans can provide a solution.

How Do Non QM Bank Statement Loans Work?

Here’s an overview of how the non qm bank statement loan process works:

• Borrower provides 12-24 months of personal and business bank statements – The lender reviews deposits, balances and cash flow to assess ability to repay the loan.

• Loan amount based on bank statement analysis – The lender determines the max loan amount the borrower qualifies for based on the bank statement analysis. Loan amounts may be lower than with a conventional mortgage.

• Alternative income documentation – Borrowers can provide some supplemental documentation like CPA letters, 1099s, P&Ls to give the lender greater confidence

• Higher interest rates – Because the income is not verified in the traditional way, non qm bank statement loans come with higher interest rates than conventional mortgages.

• Investment properties allowed – Non qm bank statement loans can be used to purchase or refinance investment properties in addition to primary residences.

• Prepayment penalties – To offset the additional risk, lenders may require a prepayment penalty if the borrower pays off the loan within the first few years.

Pros and Cons of Non QM Bank Statement Loans

Non qm bank statement loans provide great options for some borrowers, while others may be better off with a conventional mortgage. Here are some of the key pros and cons to consider:

Pros

• More flexible qualifying for self-employed or borrowers with irregular income
• Can use bank statement deposits as income verification without documentation
• Allows cash flow analysis for repayment ability vs strict income requirements
• An option when you can’t qualify for a conventional mortgage
• Purchase or refinance investment properties

Cons

• Higher interest rates than conventional mortgages
• Lower loan-to-value ratios resulting in higher down payments
• Lenders have strict reserve requirements
• Prepayment penalties may be required
• Overall higher costs than conventional loans

As you can see, non qm bank statement loans fill a need but aren’t right for every scenario. They provide more flexibility but come with higher costs and stricter requirements in other areas.

What Do Lenders Look For?

When reviewing a non qm bank statement loan application, here are some of the key things lenders analyze:

• Sufficient assets – Lenders want to see adequate assets (like money in the bank) to cover down payments, closing costs, and reserves.

• Strong cash flow – The bank statements need to show consistent deposits to cover the proposed mortgage payment and other obligations.

• Clean deposits – Lenders look for a track record of deposits from identifiable sources without large one-time anomalous deposits.

• Solid credit history – Minimum credit scores around 660+ are required though some lenders may go lower.

• Low DTI – Debt-to-income ratios may be capped at 43-50% compared to up to 55% with conventional mortgages.

• Reserves – Expect to need 12-24 months of mortgage reserves. Conventional mortgages typically only require 6 months reserves.

• No early payoffs – Lenders want to see loans paid as agreed so expect restrictions on paying off the non qm loan early.

What Types of Income Qualify?

One of the big advantages of non qm bank statement loans is they can accommodate less traditional sources of income. Here are some examples:

• Self-employment income – Income from being self-employed or freelance
• Investment income – Income from interest, dividends, capital gains
• Rental income – Income from investment property rentals
• Retirement income – Income from 401k/IRA withdrawals, pensions, social security
• Commission income – Irregular commission-based income
• Bonus income – Bonuses and overtime
• Alimony/child support – With proper documentation
• Trust/inheritance income – With proper trust documents
• Cryptocurrency income – Income verifiable on your bank statements

The key is being able to document the income source on your bank statements. The above sources may not qualify for a conventional mortgage but could work with a non qm bank statement loan.

What Credit Score is Needed?

To qualify for a non qm bank statement loan, you’ll generally need a minimum credit score around 660, though requirements vary by lender. Some may go down to 600 for strong borrowers. The minimum down payment also goes up as your credit score goes down.

Here are some general credit score guidelines:

• Credit Scores 700+ = Opens up the most options
• Credit Scores 660-699 = May require higher down payment like 20%
• Credit Scores 600-659 = Higher rates and costs but programs exist

The higher your credit score and down payment, the better the rates and terms you can qualify for. Work on improving your credit before applying.

Do I Need a Down Payment?

While zero down payment mortgages exist, they are very rare with non qm bank statement loans. Most lenders will require at least 10-20% down.

The down payment requirement depends on several factors:

• Your credit score
• The type of property – investment or primary residence
• The size of the loan
• Which lender you use

To get the best rates and terms, aim for at least 20% down if possible. With lower down payments, you’ll pay higher rates and costs.

Some lenders may go up to 80-90% loan-to-value for very strong borrowers. But it’s more common to see maximum financing of 70-75% loan-to-value.

Do I Need Reserves?

Expect to have significant cash reserves with a non qm bank statement loan. Lenders want to see reserves equivalent to 12-24 months of mortgage payments. This provides them an extra cushion since your income is not verified traditionally.

With conventional mortgages, lenders typically only require 3-6 months of reserves. But because non qm statement loans are higher risk, they require bigger reserve cushions.

The reserves help mitigate the risk of the loan by providing a backup source of repayment funds. Try to have at least 12 months of reserves, and shoot for 24 months if possible.

Can I Get a Non QM Loan for an Investment Property?

Yes, non qm bank statement loans can be used to purchase or refinance investment properties. This sets them apart from most conventional mortgages.

With a conventional mortgage, investment properties often require 25-30% down and have lower loan limits. But non qm bank statement loans provide more flexibility.

You’ll still need excellent credit, significant reserves, a down payment, and strong cash flow. But you don’t have to be the owner-occupant like most primary residence loans require.

This flexibility allows real estate investors to tap into their bank statement deposits and grow their rental property portfolios. Just know that investment loans will have higher rates and stricter requirements than primary residence loans.

Can I Get a Non QM Loan with Recent Credit Events?

Non qm bank statement loans allow more flexibility than conventional mortgages when it comes to credit events like bankruptcy, foreclosure or short sales. However, significant time and rebuilding is still required.

Here are some general guidelines on qualifying with past credit events:

• Bankruptcy: Minimum 4 years since discharge required
• Foreclosure: Minimum 5 years since event required
• Short Sale: Minimum 4 years since event required
• Loan Modification: Minimum 2 years since event required