Bank Statement Loans Explained: Part 3 | Income Calculations

Wondering how lenders calculate income for a bank statement loan? In this episode, we break down how underwriters review 12 or 24 months of bank statements, which deposits count toward qualifying income, and why personal transfers, refunds, and non-business deposits are excluded. You'll also learn how expense factor ratios work, when a CPA comfort letter can help, and how seasonal or inconsistent income is evaluated. Whether you're self-employed, own an LLC, or have fluctuating business revenue, this episode explains what lenders are really looking for when qualifying your income using bank statements.

Transcript

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Hey everyone. Welcome back to All Things Home Loans, Credit, and Real Estate. I am your host, Deb, the Mortgage Queen. So let's start learning. Let's talk about how income gets calculated with these. This is kind of a little bit of a misunderstanding that is just because it gets deposited in there, it's money that we can have. So let's walk through what that looks like. Really, uh, we look over a 12 or 24 month window, and it depends on which loan product we're in. It looks like uh, or it depends on which credit score, what kind of down payment, which investor, some of those come to play. But really, 12 months is kind of where we start, just because that is our best path for the majority of our investors. We look at the whole big picture of what's going in. So we look at the deposit, and it's not just on page one, it says I've deposited $12,000. It's not just that. We have to look through what's going on. So if you have a return from Amazon, can't count that. If you have transfers from your personal account, can't count that. If we have transfers from any other account that we don't have tied to the business operations, we can't count that. There are just the share deposits that go into that, or maybe automatic deposits that are going in from like Venmo, if you're doing a service. Those transactions that we are using for the income part of this have to tie back to your business operations. I had one that I did a couple of years ago and it was a payroll deposit, a QuickBooks payroll. The underwriter was really panicked about it because they're like, wait a minute, this is supposed to be self-employed. They just have QuickBooks set up to pay them a certain amount of money out of another account. So we had to get the other bank statements that showed the deposits from the business and then the bank statements from that business over to him on this other account. He had a lot of pass-through stuff going on, which whatever, we can chase the money. But the big thing is looking at those deposits is not just the lump sum on page one and being able to use that number. We have to analyze what's going on with that. And we have the ability to use personal and business accounts. So in a tax world of an LLC, I would say that in most cases, they allow you to do personal and business money transactions out of one account. They're okay with that. I'm not a tax advisor, so obviously you've got to talk to your tax people. But if it's a personal account and you've never converted it into ABC Business LLC, it's just Suzy Q's name on the bank statement. That doesn't automatically just disqualify you from being able to use bank statements for qualifying income on that particular account. We just have to prove that they are actually business income, not that you're just depositing all the money that you get from grandma for birthdays. You know, we can't use any of that. There is also an expense factor ratio that comes in. And depending on if we can get those comfort letters from the CPA, we like to call them comfort letters. There's a handful of CPAs that won't write a letter that tells us how much of the percentage of your deposits are actually going towards business operations. Sometimes they just can't. Maybe they're not allowed to in their organization to be able to write that letter. So just for the sake of like calculating what it is, if we go through the 12 months of bank statements and we show that your annual deposits calculate up to 240,000, let's just use that as our number. If we're not able to get a letter from the CPA, we're automatically, and sometimes even if we get the letter from the CPA, it's just as easy to do this, but we are automatically going to take 50% of those deposits away just for the expense factor ratio, just for the sake of not having to chase paperwork, just for the sake of ease, is really what it is. If we can take that $240,000 and say, hey, 50% of that is $120,000. Can I qualify on $10,000 a month in income? Can I do this loan if I only show $10,000 a month in income? Some cases, yes, some cases no. But for my scenario, let's say that we can, that our debt ratio is supported by that $10,000 a month in income. Well, then that's it. That's what we've calculated for your income. That's what you're qualifying off of. Obviously, what we've already talked about in the previous episode was what happens if those deposits are declining? What if the trajectory is that it's going down, down, down, down, down? The up and down and up and down and up and down is okay as long as the trajectory is going up. And we have to look at those on a case-by-case basis too. Depending on what time of the year you're doing this loan and what your business is. Obviously, if we are a summertime business and we are in the month of June, then we're gonna go from June, say June of 25 to June of 26. Well, the winter months are your low months and there's not going to be as many deposits. Well, then they might want us to throw in a 24-month history. They might want a letter of explanation. We definitely have to write a letter as to what your business operations are. So if you're a landscaper, it's obvious if you're in Idaho that you're probably not putting grass in in December. No matter really what the weather is, you're more than likely not installing sprinkler systems in January, which is not what's going on. It's kind of a logical thing if you're in certain states that you're not going to be doing certain things. Likewise, if you're ski patrol and you're doing a ski patrol school for snow, you're not going to be doing that in July. So, likewise, you know, summer, winter. We got to use our brain just a little bit there. The big ones is solar cells. Solar cells are usually big chunks of money and very inconsistent because you can have one month that you have two or three sets go on the roof, and you can have two or three months that you're just sitting at zero. So solar sales is definitely an interesting thing, but completely workable. Those big lump sums that come in for farming, the big lump sums that come in for more of a quarterly collection of income. Definitely we have to just explain the situation that's going on with that as well. So we look at the overall picture. I have the down payment that I need to be able to use a bank statement program for qualifying on my income. I have the ability to just check all the boxes to make this work. But the question is, is this this loan really the right thing for you to do? Is this really the right thing to take advantage of this program? And in our next episode, we're gonna talk about the pros and cons of using a bank statement loan for qualifying and all the ins and outs of that piece of it so that we really can understand what we're walking into when we do choose bank statements as our income qualification source. And uh until then, thanks. Thanks so much for listening. I really appreciate it. So stay tuned. We are gonna learn some more next time.