Bank Statement Loans: Part 5 | Mistakes To Avoid

Thinking about using a bank statement loan to qualify for a mortgage? In this episode, we cover the most common mistakes self-employed borrowers make and how to avoid them. Learn why separating personal and business finances is critical, how cash deposits and overdrafts can impact your approval, what happens if you've recently changed your business structure, and why it's important to get fully pre-approved before making an offer on a home. If you're self-employed, these practical tips can help you prepare your finances and improve your chances of qualifying with a bank statement loan.

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. A couple of mistakes we want to stay away from when it comes to using bank statements as our income source. One of the biggest ones is intermingling the personal and the business. If you have a business income going into a business account, all of your business operations going into one account, and then you have your personal stuff going on over here, it keeps everything so much cleaner. As soon as you're depositing money into your personal account, transferring over to your business account and doing all that, the transfers kind of get hard to follow. You don't want to do that. And then questionable. If you're putting money into your personal account as a share deposit and then it's transferring to your business account, why are you doing that? Is that really business income coming in? And where we're documenting income from actual bank deposits that are going in, it's critical that we actually pay attention to that stuff. So right now, if you're in a position that you want to in the future use bank statements as income documentation, fantastic. Clean it up. Just get your personal in one account, get your business in one account, your accountant's going to be thankful for you. You're going to be so much happier when you get to the end of the year and you have to prep for filing for income taxes. So make sure that you're doing that separate. If you're in a position now, you're like, oh my gosh, I've already co-mingled some of my funds. That's okay. That doesn't stop you from being able to do this. We just probably have a little bit of paperwork ahead of us to be able to get that cleaned up. So don't have that be your stopping point. Just pause for a minute and realize we might need a little bit more information. Cash deposits are not king. Do not make cash deposits. And even if somebody pays you in cash, that's fine. It'll just show as a share deposit or just a random deposit on your bank statement. But be prepared that we might need the invoice that goes along with it if it just shows a share deposit. If you're usually receiving all of your income from Zenmo or a Cash App or something like that, and then all of a sudden we just have this random share deposit, just be prepared. We might have to have an invoice to back up the receipt of that cash. We won't know necessarily that it was cash and somebody didn't write you a check or get you a cashier's check, but it is something that we might have to be prepared for to pay portrayal, though that actually was a business deposit. Another thing that we have to be prepared for is money left over in your bank account. I actually had one as kind of an example. I had a bank statement that the man took everything out of his business bank account. The deposits of the business all went into that. And then he shuffled them out for various things. He had an account that he had all of his bills paid out of. So his paycheck per se. Well, at the end of the month, he just didn't show that he had very much money. That's not necessarily the problem. The problem is if you get insufficient funds. So if you're moving all your money out for various reasons, obviously you have operations, but if you go into the negative, that's when it starts looking like you're not responsible with your money and gets a little bit scary, considering we're trying to use that income and the lack of a negative bank balance to show that you can make a payment. So if you're living in the negative, not the greatest place to be, don't do that. Don't change your business structure. Changing your business structure is really tough. If we know we're going to buy a house in the future, or once again, if you have already changed your business structure and in the last 24 months we're going to see that, we'll deal with it. Maybe a little bit more paperwork. But think this way: if I've been a sole proprietor and all I've done is just use my regular personal tax returns to document my income and all of that, then you change to a corporation. And now you're a corporation where you have a business tax return on top of a personal tax return. Well, at that point, we definitely are going to have to have a conversation with your accountant because you've been self-employed. So I've been self-employed as a sole proprietor. Halfway through last year, I decided for tax purposes that I'm going to become a corporation. We just have to make sure that your accountant's going to acknowledge that you have been self-employed for the correct amount of time. Not self-employed as a business owner, just collectively self-employed as a sole proprietor, self-employed as a business owner, as long as the business has stayed the same. I can't go from landscaping to all the sudden diesel mechanics. My company structure has to stay the same in the type of business that I'm also operating in. That's something that's critical as well. Don't go under contract on a house if you're doing a bank statement loan. That is not the program to stretch yourself on, meaning my credit scores are 800. I got 30% in my bank account. I'm golden real estate agent. You just go ahead and get my offer in. Don't do that. That is the one loan program that is very sketchy to get through. We have to make sure we have appreciating income. We have to make sure we can get our letters from the CPA. We have to make sure all of our I's are dotted and our T's are crossed. Is the one program that I would never ever let anybody go under contract until I've seen and analyzed all 12 months of those bank statements and got a couple of the letters that I'm required to have. So do not just trust that because you have 800 credit scores and 30% down, that you can get a loan. Just don't trust that. Make sure you have talked to me and I can help you. Make sure that that commitment to buy that house can actually happen and come to fruition. So if you're self-employed, do not automatically disqualify yourself. Call one of our team members. We'll walk through what the plan looks like. If you already feel like you've failed somewhere, we can get you on a path so that in 12 months from now or somewhere in between, we can actually get into the house. Just start stockpiling money because it does require a bigger down payment. But do not feel like you have to just pay a bunch of money to the IRS and file your income taxes a different way. We can look at doing an alternative bank statement program for documenting income. So, anyways, self employment bank statements, it's a wonderful program. Thanks so much for listening. I really appreciate it. So stay tuned. We are gonna learn some more next time.