How do you meet atr requirements for bank statement loans
ATR Requirements for Bank Statement Loans
The Ability-to-Repay (ATR) rule is mandatory for most consumer residential loans, and Bank Statement loans, as a primary Non-Qualified Mortgage (Non-QM) product. The ATR requirements for Bank Statement Loans are met through comprehensive cash flow analysis and strict verification standards.
The underwriting process for Bank Statement loans focuses on rigorously documenting the borrower’s capacity to repay by substituting traditional W-2s and tax returns with verified cash flow data.
Meeting the Core ATR Requirement
The ATR rule requires us to make a good-faith effort to determine that the applicants have the ability to repay the mortgage. For Bank Statement loans, this is achieved by adhering to the General ATR Option, which involves documenting eight minimum underwriting considerations.
A. Core Documentation Principle (Exclusion of Tax Returns)
The fundamental difference in meeting ATR for Bank Statement loans compared to Full Documentation loans is the exclusion of tax documents:
- The Bank Statement program is designed for self-employed borrowers who cannot qualify with tax returns.
- Tax returns and the IRS Form 4506-C are generally not required for the Bank Statement program.
- If tax returns or transcripts are provided in the file, the loan will often be ineligible for the Bank Statement Product and must follow Full Documentation guidelines instead.
Documenting Capacity and Income (ATR Factors 1, 6, & 7)
Meeting ATR requires establishing the borrower’s income/assets (Factor 1) and ensuring the resulting debt-to-income (DTI) ratio (Factor 7) is acceptable after accounting for current debts (Factor 6).3
1. Income Qualification via Cash Flow Analysis
Underwriters calculate the borrower’s monthly qualifying income by analyzing bank activity over an extended period:
| Documentation Type | Requirement | ATR Compliance Method |
| Required Statements | 12 or 24 consecutive months of bank statements are required (personal or business). | The statements must support stable and predictable deposits. |
| Income Calculation | Total eligible deposits are averaged over the 12 or 24 months to determine the monthly qualifying income. | This average replaces traditional W-2 or tax return income to satisfy ATR Factor 1. |
| Business Statements | If business bank statements are used, the income calculation must incorporate a deduction for business expenses to determine net income. | This ensures the qualifying income reflects the Ability-to-Repay based on net cash flow, not just gross receipts. |
| Expense Ratio | Lenders use one of three methods: 1) A fixed expense ratio (often 50%), 2) A third-party prepared P&L statement, or 3) An expense ratio letter from a licensed CPA, EA, or PTIN (often minimum 15% or 20%). | The expense ratio must be reasonable for the profession. |
2. Verification of Deposits and Stability
Underwriters must exercise due diligence to ensure deposits reflect continuous business income and exclude ineligible sources:
- Ineligible Deposits: Underwriters exclude large, one-time deposits or deposits clearly derived from non-business sources (such as transfers from other personal accounts, tax refunds, credit card advances, or loan proceeds).
- Large Deposits: Unusually large deposits that are greater than 50% of the average monthly deposits must be investigated. A letter of explanation (LOE) is required, and the deposit must be consistent with the business profile. If the LOE is sufficient, no further sourcing is required.
- Declining Income: If the bank statements show a declining income trend (e.g., 25% or more decrease in the most recent three months), a satisfactory LOE is required. The underwriter must review the explanation to support the viability of income and overall strength of the transaction.
3. Calculating DTI and Residual Income
The calculated income is used in conjunction with verified liabilities (Factor 6) to determine DTI (Factor 7).
- Maximum DTI: The maximum DTI ratio for Bank Statement loans is typically 50%. Loans cannot exceed this limit.
- Residual Income: Residual income is required for Bank Statement loans and is determined by subtracting total monthly debts from total gross monthly income. The residual income must meet a minimum threshold (e.g., $2,500) for Bank Statement loans.
- Qualifying Payment (I/O Loans): If the loan features an Interest-Only (I/O) payment, the DTI must be calculated based on the fully amortizing Principal and Interest payment over the remaining amortization period (e.g., 20 years for a 30-year I/O loan). This ensures the borrower can afford the full payment once the I/O period ends.
Documenting Employment and Credit History (ATR Factors 2, 8, & 5)
ATR compliance also requires validating the consumer’s employment status and credit history.
1. Employment and Business Verification (ATR Factor 2)
- Self-Employment Requirement: At least one borrower must derive their primary income from a self-employed activity. Self-employment requires a minimum of 25% ownership in the business.
- Minimum History: Borrowers generally must have been self-employed in the same business for at least two years.
- Business Documentation: Underwriters verify business existence and activity through methods such as a letter from a CPA/Tax Preparer, a Business License, or confirmation from a regulatory agency.
- Business Narrative: The borrower must provide a signed written narrative detailing the description of business operations, customer base, and number of full-time employees.
2. Credit History and Housing (ATR Factors 5 & 8)
- Credit Score: Although Non-QM is flexible, Bank Statement loans typically require a good credit score (often 620 or higher, with many requiring 700 or up).
- Tradelines: The borrower must generally meet minimum tradeline requirements (e.g., two trades reporting for 24 months, or three for 12 months).
- Housing History: A minimum 12-month housing history (mortgage or rental) is required. This history must often reflect low delinquency, such as 1×30 in the last 12 months. The history can be verified via the credit report, institutional VOR/VOM, or bank statements showing payments.
- NSF/Overdrafts: We analyze NSFs (Non-Sufficient Funds) or overdrafts. For example, some guidelines restrict NSFs to a maximum of three to five occurrences within the most recent 12 months. An LOE is required to ensure these incidents are not due to financial mishandling.
FAQ's
At least one borrower must often have a minimum 12-month history of owning and managing rental properties within the most recent three years.
Lenders typically require reserves (liquid assets) to cover potential debt payments, often mandating 6 months of PITIA or ITIA for the subject property.
While some programs offer “No Ratio” options, the minimum DSCR typically ranges from 0.75 to 0.80.
If the Loan-to-Value (LTV) ratio is 75% or less, the DSCR calculation may be based on the Interest-Only payment (ITIA) rather than the fully amortizing payment (PITIA).
A DSCR above 1.0 indicates that the property earns enough to cover the mortgage, meaning the investment has a positive cash flow in the lender’s view.
DSCR is calculated by dividing the Gross Rental Income from the property by the PITIA (Principal, Interest, Taxes, Insurance, and Association dues).
No income or employment is verified for this product, and consequently, no Debt-to-Income (DTI) ratio is calculated.
Qualification is determined solely based on the debt service coverage ratio (DSCR) of the subject property only.
No. Loans deemed strictly for business purposes are generally exempt from the ATR (Ability-to-Repay) and QM (Qualified Mortgage) requirements.
DSCR loans are specifically designed for investment property transactions designated for business purpose only.
527 Sycamore Valley Rd W, Danville, CA 94526
Toll Free Call : (866) 280-0020
For informational purposes only. No guarantee of accuracy is expressed or implied. Programs shown may not include all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions may apply. Equal Housing Opportunity.
Interactive calculators are self-help tools. Results received from this calculator are designed for comparative and illustrative purposes only, and accuracy is not guaranteed. Shining Star Funding is not responsible for any errors, omissions, or misrepresentations. This calculator does not have the ability to pre-qualify you for any loan program or promotion. Qualification for loan programs may require additional information such as credit scores and cash reserves which is not gathered in this calculator. Information such as interest rates and pricing are subject to change at any time and without notice. Additional fees such as HOA dues are not included in calculations. All information such as interest rates, taxes, insurance, PMI payments, etc. are estimates and should be used for comparison only. Shining Star Funding does not guarantee any of the information obtained by this calculator.
Privacy Policy | Accessibility Statement | Term of Use | NMLS Consumer Access
CMG Mortgage, Inc. dba Shining Star Funding, NMLS ID# 1820 (www.nmlsconsumeraccess.org, www.cmghomeloans.com), Equal Housing Opportunity. Licensed by the Department of Financial Protection and Innovation (DFPI) under the California Residential Mortgage Lending Act No. 4150025. To verify our complete list of state licenses, please visit www.cmgfi.com/corporate/licensing