Loan Officer Training - 12/10/2024 - Structuring Bank Statement Loans for Loan Officers

In this episode of Loan Officer Training, we explore the art of structuring bank statement loans, a powerful solution for borrowers who don’t meet traditional income requirements. Discover what bank statement loans are, who they’re ideal for, and the key strategies to analyze and structure them effectively.

Our expert host, Jose Gonzalez will share tips on how to communicate with self-employed clients to build trust and understanding, as well as common pitfalls to avoid. Whether you’re new to bank statement loans or looking to refine your approach, this episode is packed with actionable insights to help you close more deals and grow your business.

Tune in and take your loan officer skills to the next level! 🎧

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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 thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mortgages, P&L Mortgages, Asset Based Mortgage Programs, No Ratio CDFI Loan Programs, DSCR Investor Mortgages, Commercial Mortgages, Fix and Flip Mortgages and thousands more!

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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 Dec 10, 2024 • 05:02:56 PM: 0:13

Bank statement loans are a loan which uses the borrower's business personal or commingled, which means combining both. bank statements to calculate the monthly income. We can use 12 or 24 months worth of bank statements. Uh, bank statement loans are for self employed borrowers only. Please do be aware that, um, we have, uh, different options. We have, um, bank statement loans where we can also combine, uh, other income types that the borrower or co borrower may have, like W 2 income, profit and loss, asset utilization. or 1099s. So, who are the eligible borrowers and transactions for a bank statement loan? You know, again, I mentioned self employed borrowers with minimum two years in business. However, we do have exceptions for this. Um, the borrower can be one year in business, for example, if they were previously employed performing the same job duties as a W 2 employee. We're talking examples like an electrician. That is licensed could have been W 2 and now he's 1099 or just totally self employed. We could have a doctor or we could have a nurse. Those are just three common examples of individuals that we could approve them having only been one year in business, as long as they were previously performing the same job duties as a W 2 employee. Now obviously eligible borrowers for these transactions are U. S. citizens, permanent resident aliens. non permanent resident aliens with a work authorization document or an ITIN borrower. Please note that uh, foreign national borrowers are not eligible uh, as uh, to do a bank statement loans because foreign national borrowers do not derive their income if they're actually being qualified as a foreign national borrower cannot derive their income from the U. S. Uh, the maximum LTV on any bank statement loan is going to be 90 percent LTV. That's going to be for a purchase on a primary, uh, maximum cash out, maybe as high as 85 percent LTV, but most of the options I'm seeing right now, cap you at 80 written term, refined, definitely max 85 percent LTV. We have delayed financing transactions. That's where a borrower, uh, buys a property cash. And within the first six months wants to do a refinance to, uh, recuperate the, whatever money they put out on the transaction. That's called delayed financing. And then we also have second mortgage options through our HELOM option, which is a fixed rate second mortgage that'll go up to a max 85 percent CLTB when it's a primary owner occupied transaction for a HELOM. So, what about program options, right? Be, do be aware that all non QM programs have guideline variations that are specific to that option, right? So, you cannot generalize and say, for a bank statement loan, can you do such and such thing? Because it's really going to depend on what the guidelines state. So most, uh, you know, you can use, like I mentioned, business bank statements or personal bank statements or commingled. If you're using business bank statements, uh, you're going to start with at least a 50 percent expense factor. Now again, do be aware, like you see there on the photo fixed expense ratio. That's actually from the guidelines from one of our conduits where if, for example, you have a business that it's a service related business with no, uh, employees other than yourself, the expense factor for that, uh, transaction would only be 20%. So you would be able to capture 80% of the deposits. If that same business had one to five employees, the expense factor increases to 40%, which means you would be able to capture 60 percent of the deposits. So the expense factor, uh, can be, um, um, modified with a CPA letter. So if, for example, you do have those one to five employees, But the accountant can document in the letter that your expense factor is actually 30 or 25 percent, then we can use a higher percentage of the deposits. That's increased. That's to increase the profit with a CPA letter. And like I mentioned, some program options have the expense factor table. Like what I just showed you. And that's what you have to consider when you're structuring the deal. That's why it's so important to ask the customer to complete the business narrative, which is the document that they answer that states the structure of their business, how many employees do they have a location? Do they pay rent? All that kind of stuff that's going to help determine their overhead. Now, when you use personal bank statements, we are allowed to use a hundred percent. Of the business related deposits, but keep in mind that the only way to use 100 percent of the business related deposits when using personal bank statements is when we also have business bank statements. According to the guidelines, they're going to need anywhere from 2 to 3 months worth of business bank statements to document the expenses that are covered by the business. If the borrower provides personal bank statements. And does not have any business bank statements, then you will need to apply whatever is the correct expense factor for that business to the bank statement deposits. Normally, we don't include an expense factor when using personal bank statements, but if the borrower does not have business bank statements, then that will be the case. You have to apply the expense factor because there's no business bank statements when using personal bank statements. Now, you can combine business and personal, that's called commingled, for like different months. However, please note that if you are using commingled bank statements, for one month you use the business bank statements, another month you use the personal bank statement for whatever reason, depending on how the deposits were received, then you're going to have to apply the same expense factor that you would to the business bank statements as well. To the personal bank statements. So going up to our table there, if you have a product related business with zero employees, and we're submitting to the investor where I obtained this table, your expense factor would be 40%. And you would be able to use 60 percent of the deposit. So, very important that we all understand, um, when an expense factor is to be applied, especially when using personal bank statements. So, what are some of the potential issues why that we could have In a bank statement loan and what could be some of the solutions, right? Well, the patent, the most of the solutions, the solution to most of these issues is I'll just tell you ahead of time is going to be a profit and loss loan. However, most profit and loss loans do require two to three months bank statements to be produced. To document the income, um, now how much of the income you got to document depends on the guidelines, right? Some of our, one of our guidelines state you got to document at least 75 percent of the income stated on the P& L. With a current bank statement. So what are some of the issues that we have for bank statement loans? Well, some of the issues we're going to have is that the borrower cannot document the needed business history, right? They, they self file so they don't have an accountant readily available to provide a third party verification letter. Maybe they're in a business where they do not have a separate business license. Maybe they're a sole proprietor, so no corporate docs or articles of, uh, incorporation or articles of formation are available. So, I mean, those would definitely be, uh, some issues. Uh, no, if you cannot document the need of business history, For a bank statement loan, you're probably not going to be able to document the needed, um, business history for a P& L loan. So that is first and foremost when trying to document that your borrower is self employed. Be on the lookout for the potential obstacles there so you can see what you would need to do to be able to provide documentation that the borrower is actually self employed. Another potential issue with bank statement loans is declining deposit trends, right? You're seeing the monthly deposit. That's why we don't like to go more than 12 months. back on a bank statement loan because you expose the borrower to additional fluctuations of the deposit trends where we could end up with declining deposit trends. Uh, then we have large deposits that cannot be documented. That's the perfect one to go P& L on. Um, that's one of our, I mean, favorite reasons to go P& L on a bank statement loan is when the deposit trend, we have large deposits. that cannot be documented. We had a deal that went P and L because of that. The customer only had like five deposits in the whole year. Each deposit was like for over 250, 000 to 300, 000. When we asked the borrower, could he document those deposits where they came from? Um, he preferred not to go that route, stated it would be very difficult. And we ended up closing the deal as a profit and loss because we identified the issue upfront. Beware on large deposits. Beware that guidelines require all deposits greater than 50 percent of the monthly income to be documented. So if you calculate your monthly income at 14, 000 for your borrower, That means any and all deposits of 7, 000 or above need to get documented, right? Copy of the item deposited, copy of an invoice or a contract or something to document a large deposit. Uh, irregular deposit trends is another issue for bank statements, right? Some months you got deposits and then other times it may go a couple of months without any deposits. We would need to know why is that part of the business cycle of the borrower? Why? You know, would they not have deposits on any given month? So it could be a perfectly understandable reason, but we just need to know needs to be explained and possibly provide documentation. Now NSFs and overdrafts is another area of concern. Now we do have one option that does not necessarily judge the borrower based on NSFs or overdrafts, but will require solid explanations and to prove that it's no longer an NSF or overdraft. But usually, in most of the cases, more than three NSFs In a 12 month period will disqualify the deal and, um, another issue to be concerned of is, uh, for the underwriter to increase the expense ratio due to the business type. So, if you did not review that table showing the business type and the expense factor, and then you provide the business narrative and the underwriter says, wait, he has 2 employees. And it's a service related business. I needed to make a hit and I'll go back a minute to that slide. So if we did have a service related business with two employees, we'd be getting a 40 percent expense factor. So we could only use 60 percent of the deposits. So it is something to be aware of that the underwriters will get proactive or the underwriter reviews the tax, the bank statements and realizes there's a lot more expenses on there. Uh, that. Would appear then that the expense factor is higher than 20%. And they may actually do their calculations and update the expense factor due to the, um, income and expenses that's running through the bank statement. So as previously stated, the profit and loss loan is the solution to irregular deposits. high expenses and, and any of these other issues that we have mentioned here. So actually calculating the income is, um, can always be an adventure, right? But I will let you all know, please use the Investor Bank Statement Service whenever possible. Most of these, uh, investors are now making it a requirement. to have the bank statements reviewed and the income calculated by them internally before submitting the file because you have to submit the file with a copy of the spreadsheet that you were provided. Most of them will guarantee that income. So if that's a given and that's your income, now you know what you're going to deal with. We should make the structuring of the loan a lot easier. Now, please note that, um, you know, we do have like a generic. Excel spreadsheet that you can use, uh, for, uh, documenting the bank statement income, but please try to use, if you're not going to have their, the investor service complete the form, um, please make sure that, um, you do use the one that, that, uh, that we have internally to put in all your deposits. And I, I will share that in the, Following slide, but basically what you need to do, you're going to input the total of the deposits in the first column, and then you're going to back out one at a time. The non business income deposit. So if your total deposits for the month were 10, 000. But then you had 4 deposits of 250 each that were credit card returns. You'll put minus 250 in the next column, then the next one, minus 250, and minus 250, and minus 250, so that the system then will have a total of 1, 000 being deducted from the total deposits, and then you will get the amount of total deposits. In the end, so let me just show that show that to you a minute, and then we'll go back to the sheet. So you're seeing right here. This is month 1. this is the date of the bank statement. This column here is the total of the deposits in that account. And then beginning on this line, we're backing out deposits that were not applicable. Right. So in this particular scenario here, I'm backed out one of 870 and one of 34 and 58 cents. So you would do that for all the statements for all the months. And in the end, you'll have a figure over here all the way to the right, which is going to be the net deposits for the month. So let me go back to calculating. So we're going to use the Excel spreadsheet required for the investor for the option chosen. And if not using this, if not using their scenario desk bank statement review option. So I guess what I meant to say there is if you're going to load them up on a spreadsheet. Try to see first if the investor where you're sending the loan to, if you, if you, if for whatever reason you're not using their service or if you sent it to their service, but you want to document it on your own as well to compare, then make sure that you see if they have their own branded spreadsheet. Most of them do. That's branded to them with whatever adjustments they want to do and then use that form. If not, you can use our form that we have. Um, so. You're going to input total deposits and back out non business, uh, uh, income deposits. What are we referring to that these would be these non business income deposits? Uh, basically we're talking about things like transfers from other accounts of theirs that are not business income, like they just decided to transfer money into the account to cover some expenses, uh, credits. From credit card companies, for example, you know, uh, credit, credit item and unverifiable large deposits. So a large deposit, any deposit that's 50 percent or greater than the monthly income. And if any of these large deposits are not verified, uh, satisfactorily, then, um, we'll just have to back it out from the amount. Uh, be aware of the expense factor ratio restrictions and the guidelines for the option chosen already covered that a couple of times. And very importantly. Make sure you compensate for the borrower's proportionate share of the, of the business. So let's say the expense factor is already 50 50 for this, for this deal, but they, on top of that are only 25 percent owner in the company. So once you get the 50 percent off the 50 percent amount, Um, which is, you know, the amount you're going to use, right? You're giving them 50 percent of the, uh, deposits as income, and then they are 25 percent owner of the business. You're going to get that gross amount that you got, which is 50 percent of the gross deposits of the acceptable deposits after any items backed up, and then you're going to multiply it times 20%, which 25%, excuse me, which is their proportionate share of the business. To, um, get to the monthly income for that borrow. I'm using one right now where I got to multiply it times 51%, but we're still at like 25, 000 a month in income, which is pretty good. So you're seeing how the calculations work here. The most important part, I guess, is, you know, review the guidelines for the option that you're choosing. To make sure that you're following their guidelines, uh, regarding, you know, expense factor, uh, co mingled bank statements, because not, you know, I say it's possible to use co mingled bank statements, but not every, not all of our conduits allow co mingled bank statements, which means you could have a September, October, November from the, from the, from the personal, then, uh, December, January from the business, and then, uh, Uh, February moving on forward from the personal, that would be a commingled, uh, scenario where you have business bank statements and you have personal bank statements. So, that concludes our training on this. I'm going to leave the spreadsheet up there. I want to see if we have any questions. I see a question that asks, do we offer HELOC on investment properties? Yes, we do offer he locks on investment properties. The LTV obviously is lower on an investment property than on a primary. We also offer he loans on an investment property. Now, um, it's not as flexible in all of the income streams when we're going, um, to the, uh, investment property. On the HELOC, right? Uh, that's HELOC. It's pretty much going to be full dock only on those. There are some out dock options that are now coming out, but do review the guidelines on those because they're very restrictive. So do we have any questions on, uh, bank statement loan structure? The most popular non QM origination, loan origination type is bank statement. I'll give it another minute. See if we get any additional questions. Looks like we are good then with the questions on structuring your bank statement loan. Thank you for attending and I will see all of you tomorrow.