The path to homeownership has lots of different options for buyers depending on their income, and if you’ve just started this journey, you’re probably looking at all your options. Bank statements and conventional loans are two popular options, but they are very different. We’ll explore these two loans so you can make the best decision according to your needs.
What is a Bank Statement Loan?
This type of loan is designed for buyers who do not earn a traditional income that passes the traditional mortgage employment verification processes. So, instead of using tax returns as proof of income, buyers will use bank statements dating back at least two years.
This loan is best suited for the following people:
- Self employed
- Freelancers
- Investors
- Business owners
- Entrepreneurs
What is a Conventional Loan
A conventional loan is the most common type of loan and is very flexible, as it can be funded by banks, credit unions, and online originators. There are three types of conventional loans buyers can use:
- Conforming loans: These loans adhere to the guidelines about loan size and credit set out by the Federal Housing Finance Agency (FHFA)
- Nonconforming loans: These loans don’t meet the guidelines set out by the FHFA. For example, jumbo loans are nonconforming loans.
- Non-qualified mortgages: This loan is used when borrowers don’t meet the lender’s requirements
Bank Statement Loan vs Conventional Loan
Understanding the difference between the two loans can help you decide which is better suited to your financial needs.
- Application process. The application process for a bank statement loan is known to be more streamlined, as there are no extensive credit checks. Traditional mortgages have a more intensive process that involves credit checks and income and employment verification.
- Interest rate and loan terms. Because of the higher perceived risk of non-traditional income verification, bank statement loans will have higher interest rates compared to traditional loans. Traditional mortgages are considered less risky for the lender. Both loan types offer long loan terms, but conventional loans have the leg up.
- Eligibility criteria. Because bank statement loans do not use traditional income verification methods, they are more accessible. Both loan types require a good credit score, but some bank statement lenders may be more lenient with lower scores. Down payments are generally higher than conventional loans, with a minimum of 10% or higher, while conventional loans can start from as low as 3%.
Which is Better?
Both loans are good options. If you’re self-employed or don’t earn a traditional income and want a more accessible loan, a bank statement loan is your best option. If you can verify your income via W-2 forms, tax returns, and pay stubs, conventional loans have better interest rates and down payment requirements.
Apply For a Loan With Avanti Lending
Start your mortgage journey with us and move into your dream home by contacting the team at Avanti Lending in South Florida. Our experienced team can start the process today. Call us at (954) 440-6274.