Loan Officer Training 08/21/2024 - How to Structure Bank Statement Loans

In this episode of Loan Officer Training, we explore the strategic use of Bank Statement Loans, a valuable financing option for self-employed individuals and others who may not have traditional income documentation. Discover how these loans use bank statements to verify income, making them an ideal choice for borrowers with irregular income streams or those who face challenges with conventional documentation.

We’ll discuss the benefits of Bank Statement Loans, including flexibility in income verification and potential advantages over traditional mortgage options. Learn how to assess a borrower’s eligibility, calculate their qualifying income, and guide them through the application process effectively.

Whether you're looking to expand your product offerings or enhance your expertise in serving self-employed clients, this episode provides practical insights and tips for leveraging Bank Statement Loans to meet your clients' needs and grow your business.

Tune in to unlock the potential of this specialized loan product and elevate your role as a knowledgeable loan officer.

Join The Mortgage Calculator at https://themortgagecalculator.com/join

About The Mortgage Calculator:

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventiona

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Aug 21, 2024 • 11:06:39 PM: 0:16

Good evening. Welcome to the loan officer training series with the mortgage calculator. Tonight we're going to be talking about how to structure bank statement loans. So give us just a moment here to go so welcome everyone. My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our President Nick Hiersche and our Chief Sales Officer, Jose Gonzalez. We are, uh, A lender that specializes in non QM loans and what we do every Tuesday, Wednesday and Thursday evening at 7 p. m Eastern on this show is go through a in depth loan officer training topic tonight's topic is definitely great because again, we specialize in non QM loans here And this is the most popular non QM loan for primary residences. That is for sure So I will let Jose go ahead and take it over from here. He has plenty of experience with bank statements Good afternoon, everybody. Yes, bank statement loan is definitely one of the funnest loan types to do, right? Because this is the one where you can definitely exceed the borrower's expectations. They come to you, maybe not knowing what a bank statement loan is. They're self employed. They're showing you the tax returns and you're like, oh. Mr. Smith, I don't know. You're only showing 2, 000 a month here in income. So let's see your bank statements and all of a sudden you review the business bank statements and you're like, but, luckily for you at the Morgan's Calculator, we have all these alternative doc, products and using your business bank statements for the last 12 months. You qualify based on an income of 24, 000 a month. So now all of a sudden, the sky's the limit for the house that they want to purchase. So let's get right into how to structure bank statement loans. That's really why the bank statement loans are, basically fastest growing segment of origination. They grew definitely, post pandemic interest rates shot up a lot of borrowers that, got priced out due to higher interest rates. For the properties, but using bank statements, the self employed borrowers were able to resolve the situation. So what exactly do we mean by a bank statement loan, right? I mean, we're not giving a loan to a bank statement, correct? It is a loan, it is a non QM loan which uses the borrower's business, personal, or commingled bank statements to calculate the monthly income. You, you can use either 12 or 24 months bank statements, self employed borrowers only, and real important to note, uh, with most bank statement loan options, you can combine additional income types with the same borrower or additional borrowers or co borrowers on the loan, right? So you're going to have the same borrower qualifying with bank statements as the main income, and then add W 2, P& L, asset utilization, or 1099, or even all four if applicable. Right. So a lot of options there in non QM. So don't think this is just for bank statements. This is bank statements plus whatever other income type you can document according to the guidelines. So what are our eligible borrowers and transactions? Well, I mentioned self employed borrowers usually, right, minimum two years. There's a two year requirement in business unless Right. Unless there is an exception here. The, if the borrower has been in business for at least 12 months and what, and previously performed the same job duties. As a W 2 employee, like an electrician, a doctor, or a nurse, if we can show that connection, and with a limited employment gap, of course, then pretty sure that we would be able to, approve you for that loan, if that's your scenario, if you've been at least 12 months. self employed, but you were doing the same job duty or type, previously as a W 2 employee. Now we have first mortgage options and second mortgage options. First mortgage options max for a purchase, 90 percent LTV, cash out refi, 85%. 85 delayed financing, 90 percent delayed financing. That's where you bought a property cash and you're going to refinance it within six months after the initial purchase, that will, that's called the delayed financing. And usually that is the borrower qualifies for that under purchase. Matrix, right? So. That's why it's max 90 percent LTV because that's the same max LTV for a purchase. And then we have second mortgage options as well or HELON and even HELOC options using bank statements to qualify the borrower. Those options are max 85 percent CLTV meaning between the first mortgage And the second mortgage max, 85 percent C L T B. So what are some of our program options? Well, I always like to state this at all non QM, Loan types, all program options will have guideline variations specific to that option, right? Each option is an investor that we sell the loans to. They all have different requirements, for their loans that they will purchase. That's what we, as the originators, call the guidelines. The guidelines that we have to abide to in order to be able to originate and fund that loan. Now our program options, you heard me mention this already. We have our business bank statements. Now business bank statements start with a 50 percent expense factor, which means if it's 100 percent total, 50 percent expense factor, that means you have a 50 percent profit margin. You can increase the profit margin or decrease the expense factor. With a CPA letter. Now, I put CPA because that could be accountant, tax preparer, or actual CPA. Depending what, information the CPA puts in the business narrative letter, and then can state the business's expense factor, we will then give them the, difference as the profit margin on the deposits. In other words, 100, 000 a month in deposits. If we deem that it's a 20 percent expense factor, they're going to get 80 percent of the deposits or 80, 000 as that month's income. Now, please do know that some program options have expense factor tables based on business type. And overhead expectations, that's real critical. So usually if it's a zero employee business, one man show, it's going to have, we have options for 20 percent expense factor, 80 percent profit. Then when you go to zero to one employee that could increase the expense factor, likewise, reduce. The profit margin and I do have a sample for you on the last slide. I didn't mention, okay now and then personal bank statements now personal bank statements. Theoretically, you can use 100 percent of the business deposits, but keep in mind, most personal bank statement options do require at least two months of business bank statements to show where the, where the expenses are getting paid from. Right. And also to reconcile, some of the business bank. transfers to the business bank statement. Now, keep in mind, if the borrower does not have a separate business bank statement and all they have is personal bank statement, there's a good probability that the guidelines call to add an expense factor to the personal bank statements since they only have personal bank statements and do not have business bank statements. So, so the assumption is that the business expenses are getting paid through the personal bank statement. Hence, that's why you do not get a hundred percent of the deposit when using personal bank statements, unless you can provide separate business bank statements, at least two or three, depending on the guidelines, so that you can show how the expenses are getting paid. If you do have the separate business bank statements. and meet the document requirements and what you need to provide there. You can use 100 percent of the documented business deposits in the personal bank statement. Now, as mentioned previously, you can combine business and personal, that's called commingled statements. When you do commingled statements, the expense factor on the personal statements is going to be the same as the business. They're not going to give you 100 percent of the deposits in the business and let's say 50% Of the deposits in the business. And so should I say, you're not going to get 100 percent in the personal and unless you have the business. So keep that in mind that then it would be it would be 5050, for example, if you had a 50 percent expense factor in the business and commingling. It's across the board application of the expense factor. Now, what are some of the potential issues right now? We do have a workaround for this, which I let you know at the end. But the potential issues number one. Biggest one cannot document the needed business history, right? The borrower self files, they don't have any CPA account and tax preparer that can provide the third party verification letter. I mean, it's hard to figure that's not going to happen, but that does happen every now and then. They don't have a business license. Or they're a self, they're a sole proprietor, and they don't have any corporate docs or articles. Those are all scenarios that can, that have occurred, do occur, that could result in not being able to properly document that the borrower is self employed. Another potential issue, declining deposit trends. This is actually Probably the most popular negative issue, declining deposit trends, right? That's why you're not gonna usually use 24 months instead of 12 months, just because 24 months may give you a quarter of a point lower fee, but that means that the look back period is extended by, by another 12 months. And what if it, what if that previous 12 months, the deposits were higher and now the current 12 months, the deposits are lower, you have a problem. You may not get that loan approved as a bank statement loan. Another potential issue, large deposits that cannot be paid. Documented, right? Typically, it could either be large deposits for assets, but here we're talking about large deposits for income, large deposits for income and a large deposit by most guidelines and not all guidelines will be a deposit that is 50 percent or greater than the monthly income. So if we calculated our income and it was 20, 000 a month average over the last 12 months, then any deposit over 10, 000 is going to have to be documented. And what do you mean by that? Okay, you got a 10, 000 deposit. Does it say where it came from? Was it a transfer? Was it a transfer from a company? Was it just a counter deposit? Can the borrower provide a contract or an invoice? To document it, can they provide a copy of the actual deposited item that could show who it came from? And maybe a memo of what it actually was. So there's a lot of different ways to document the large deposit to prove that it was income, which is what we're talking about here, not a. Large deposits for assets, but large deposits for income and other potential issue, irregular deposit trends, right? 1 month, 20, 000 don't have anything for 2 months and another month, 20, 000 and then, you know, a regular deposit. So you may have to give a nice narrative of the business model and the business cycle for the operation. That may be normal, right? It may be that those projects pay out every six to nine months. So you got a few projects running and every now and then they pay out and you may get a nice big fat paycheck every two or three months. So perfectly, perfectly fine if it can be explained. NSFs and overdrafts. Definitely you want to look at this one. Now I will state that we do have an option that does not consider NSFs and overdrafts that are properly explained. Right. If they make sense, but then other options that if it's three or more in 12 months. The deal is dead with them. So again, for that, you'd have to really look into the guidelines, see what they state, and if anything, reach out for clarification to, uh, you know, who makes that final decision? Is it just a judgment call from the underwriter or is it just, we don't care at all, right? That's what you got to look at. Also be very aware of the underwriter increasing the expense ratio due to the business type, right? So you do your calculations based on an 80 percent profit margin, 20 percent expense factor, but then underwriter says, wait a minute, look at this business. You're you're running a retail store. Profit margin is not so high. You got more overhead. You got three employees. We're going to have to knock you down to 40 percent expense factor or 50 percent or in some cases, 60%, depending on the business type. That is a judgment call by the underwriter when you do have those types of scenarios where they can make that kind of a call when they do have the tables. And I'll show that to you again in the slide. Now, the profit and loss loan, right, is the solution to all these issues like irregular deposits, high expenses, NSFs, and all that kind of stuff. For most P& L loans, you only have to provide Two or three months, bank statements to reconcile with the P& L. And in some cases, I think there's a couple options out there that do not require any bank statements to be reconciled, any business bank statements to be reconciled against the profit and loss, right? Strictly the report and the narrative provided by the P& L. the preparer of the report. So you've heard of all the issues, you've heard of the solutions. Now, calculating the income. Really important what you should take into consideration here is again, make note all guidelines are different, right? I never get tired of saying that. With that being said, once you've identified. At least initially where you think you're going to submit the loan, right, according normally people go according to the rate. Right. But then if there's issues specific to your loan, where you may be looking for a specific guideline that has more flexibility in a certain area over another, that's where you're going to need to break it down a little bit better. But initially, you may not have that much information. Right. But make sure then that once you have outlined or identified where the loan is going. Then review the guidelines and see if they have a bank statement calculation, income calculation service. Most of them now have some type of a service where you upload the statements and usually a business narrative letter. They will review the statements and then they will reply with the, with the completed form and the income of utmost importance is to confirm with the investor regarding the income guarantee when using the service and make sure you double check their calculations, right? Sometimes they do make mistakes. What's pretty cool about this is that if it's an investor that says, Hey, whatever they put on that, on that form. Unless it's egregiously obvious that it's a mistake, we're going to accept it. And then, you know, you have overcome the income hurdle and remember on a bank statement loan, never any tax transcripts applicable, right? So don't have to wait, waste time waiting on that. So, but. Also, you want to complete the form when at all possible yourself. You want to double check the work. So see if the investor has some type of an Excel spreadsheet. We do have generic ones, but see if they may have an Excel spreadsheet that they require so that you don't do double the work. Put the deposits on the generic one and then have to do it again all over again. And typically, how are you going to complete the form? Right. And, I will show it to you right here. Now let me see if I can, I don't think I can make this any bigger, but how you're going to complete the form. Now you'll note, for example, on the upper, thank you guys, on the upper right hand side there, it says CPA expense ratio, 35%. If we're using something other than the preset 50 percent for the table, so you're going to put the expense factor there, and it's going to multiply the total deposits and reduce it by the expense factor to have your total income, right? And then you have a 12 month average or a 24 month average. Now what's really important is when you do set up the form, you want to go from the most current statement to the oldest statement. For your 12 months. And then, the first column that you see there, you want to put the total amount of the deposits, right? So the total amount of the deposits was whatever it says there, 13, 365. That's what it is. You put that there. And then in each subsequent law, column that you see there with a minus, you're going to list individually any deposits that are not applicable Business income deposits. So, you know, it's going to give you, you're going to have all deposits there and then all the way on the right hand side will be the net deposit amount. And then, the spreadsheet will calculate at all of these up, give you total deposits and then number of statements use 12. So then it gives you a 12 month average 9, 480. 85. So last but not least, I wanted to mention that you've heard me mention a couple of times about a fixed expense ratio table. Be aware that that can happen and that's a double edged sword. I've used it to my advantage when I had a zero employee business where I was able to get the borrower 80 percent of his deposits because as you see there from that table. Number of full time employees or contractors if it's zero and it's a service business And this last one I did I think he did a window treatment installation. So that's definitely service business. I was able to get him 80 percent of the deposits because it's only a 20 percent expense factor. But you will notice now, you go to the right now, one to five employees. Now they're hitting us with a 40 percent expense factor on a service business. And if it's a product business like retail store, you 60 percent expense factor. And if it's five or more employees, look at how it keeps keeps dropping. The profit margin keeps dropping because the expense factor keeps keeps increasing. So in this, in this scenario, if you had that five plus employee borrower, you would not be using this option. Because especially if they had a retail store because like a convenience store, for example, which is very common because you'd only be able to give them 20 percent of the deposits instead of the default 50 percent on many of the options we have that do not have this table and simply let you go with the 50 percent because they figure they make it up on all the ones that probably would have been 80 percent that they close at 50. that hedges their risk right there. So again, you will, you will know, like, for example, in this one where they talk about unacceptable deposits or excluded deposits, not limited to the following cash advances from credit cards, income sources already considered, right? You can't double dip. You can't get your W 2 income. If you're going W 2 and then add it also as a bank statement deposit, non business related. account transfers, like between accounts just to transfer money, tax refunds, any product returns or credits, gift funds, or any credit line deposits for business financing. You know, there's any borrowed money. Does not count as business deposits. Right? So, and this is just one of the sample guidelines. They're all different. Bring that up to you all. So definitely many opportunities and options here to increase your lending footprint with, Non QM and specifically, bank statement options. It does make up the majority of non QM loan origination. Like I was mentioning earlier, and you can see why, because what are the product? Can you have a 3, 000 taxable income be 30, 000 a month for the loan? Sorry. I thought my camera was having issues. Okay. I do not see any questions. So I think we'll go ahead and wrap it up here remember that we do this at 7 p. m Eastern every Tuesday, Wednesday, and Thursday evening with a new topic. So we will be back We'll see you tomorrow at 7 p. m. Eastern for the next episode of the Loan Officer Trade Show