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Bank statement loan explained: What is it and how does it work?

A bank statement loan makes it easier for self-employed borrowers to get a mortgage if their tax returns don’t reflect accurate income.

Getting approved for a mortgage can be challenging if you work for yourself or have an inconsistent income stream. Traditional lenders often require tax returns and pay stubs to verify income, which may not paint the full picture of your financial situation.

If this sounds familiar, don’t worry — there’s a way to make it work: bank statement loans. These unique mortgages let you use your bank statements to show you can repay the loan. They open homeownership opportunities for those with non-traditional income.

Key insights

  • Bank statement loans are a mortgage option for independent contractors with fluctuating incomes who may not qualify for a conventional loan.
  • Lenders who offer these loans use 12 to 24 months of bank statements to verify income and determine eligibility, instead of tax returns and pay stubs.
  • Bank statement loans typically cost at least one point more than conventional loans, so it’s best to try and qualify for a conventional one first.
  • Alternatives to bank statement loans include asset depletion loans, FHA loans, and home equity loans.

What is a bank statement loan?

A bank statement loan is a non-QM (non-qualified mortgage) loan designed for borrowers who don’t qualify for a conventional loan. According to Tyler Baldocchi, Regional Sales Manager at mortgage company, Planet Home Lending, it lets them use their bank statements as proof of income instead of traditional documents like tax returns and pay stubs.

Lenders offering these loans look at the borrower’s bank statements over a set period. Then, they use this information to calculate the borrower’s average monthly income and decide if they can afford the loan payments.

screenshot of a quote about bank statement mortgages from regional manager, tyler baldocchi, at planet home lending

Who bank statement loans are for

Self-employed individuals often struggle to qualify for conventional mortgages due to fluctuating incomes. Plus, their tax returns may not accurately represent their earnings because of deductions and write-offs. This can make it hard to get approved for a home loan.

Bank statement loans offer a solution to this problem. When we attended a mortgage seminar for freelancers, Veronica, a California-based loan consultant explained, “Bank statement loans would allow us to yield more income to qualify you [if you’re self-employed].” In other words, bank statements can give lenders a clearer picture of a self-employed borrower’s actual income and ability to repay the loan.

Bank statement loans cater to the following borrowers:

  • 1099 self-employed individuals
  • Consultants
  • Entrepreneurs with multiple income streams
  • Freelancers like freelance writers
  • Gig workers like rideshare drivers
  • Independent contractors like realtors
  • Small business owners

Baldocchi noted that seasonal workers with fluctuating income may also qualify. For example, “Roofers with earnings dependent on weather conditions may still get a mortgage — even if they wouldn’t traditionally meet the criteria.”

woman on laptop in bed

Source: Good Faces

How bank statement loans work

When applying for a bank statement loan, borrowers must provide a year or two of personal or business bank statements. The lender then analyzes them to determine their debt-to-income ratio and loan eligibility.

In some cases, lenders may apply an expense factor to the borrower’s average monthly deposits to account for business expenses and taxes. Once the lender assesses your income and other qualifying factors, they’ll approve the loan and proceed with the mortgage process — or tell you what you need to do to get approved.

Pros and cons of bank statement mortgages

Bank statement mortgages offer a creative financing solution for borrowers with non-traditional income. But they also come with drawbacks you should know about.

Below are some pros and cons of bank statement mortgages:

ProsCons
Can help self-employed individuals buy a home without co-signers (like parental support)Higher interest rates compared to conventional mortgages
Faster approval process compared to conventional mortgagesLarger downpayment may be required
Offers flexibility in income verificationNot offered by all lenders, so options may be limited

How to get a bank statement loan: Step-by-step application process

Getting a bank statement loan is similar to applying for a conventional mortgage — with a few key differences.

Here are seven steps you’ll take to apply for a bank statement loan:

1. Gather your bank statements: Ask your lender what’s required. Usually, it’s 12 to 24 months of bank statements to prove your income.

2. Check your credit score: Make sure your credit is in great shape, as this will affect your interest rate and loan terms. You can do this for free using a resource like CreditKarma. “A borrower with good credit and a large downpayment will be offered a lower interest rate than one with poor credit and a small downpayment,” Baldocchi shared.

3. Save for a downpayment: You’ll likely have to pay a bigger downpayment if you go for a bank statement loan over a conventional mortgage. Aim for at least 10% to 20% of the purchase price — the more, the better. If you have a property to sell, the expected profits can go toward the downpayment.

4. Shop for a lender: Look for a lender specializing in bank statement loans. Not all lenders offer this option. Once you find one, they may ask for information like your name, address, contact information, annual income, estimated household expenses, and Social Security number.

5. Get pre-approved: Provide your lender with bank statements, credit information, and other required documents to get pre-approved for the loan.

6. Shop for a home: With your pre-approval, start shopping for a home that fits your budget.

7. Close on the loan: Once you’ve found the perfect home, your lender will guide you through the closing process. This includes finalizing your loan terms and signing the necessary paperwork.

Pro tip: Talk to several lenders offering bank statement loans and compare loan offers. Before committing to one, get familiar with their APRs, estimated closing costs, and other fees.

How many months of bank statements do you need for a home loan?

The number of bank statements needed for a home loan varies by lender. But most ask for 12 to 24 months of bank statements. This is enough for them to get a comprehensive view of your income trends over an extended period.

Note: Some lenders are stricter and ask for up to 24 months of statements, while others are more lenient and accept as few as 12 months. Check with your specific lender to see what they need from you.

Bank statement loan example

Let’s look at a real-life example to better understand how bank statement loans work.

We asked Veronica about a scenario involving a couple looking to buy a $1,100,000 home in San Diego, California with a $300,000 downpayment.

To qualify for the loan, the couple has to show a combined average monthly income of $14,000 on their bank statements. This would allow them to secure a loan amount of $800,000 on the $1,100,000 purchase price.

She broke down the estimated monthly payment as follows:

  • Principal and interest (30-year fixed rate of 7.50%): $5,593
  • Property taxes (1.1%): $1,008
  • Insurance: $100
  • Total monthly payment: $6,701*

*Any HOA fees would be added to the total monthly payment.

To make this happen, the couple must show 12 months of cumulative business bank statements as proof of their income.

home with keys

Source: Tierra Mallorca

Bank statement loan vs. conventional mortgage loan: Which is better?

When choosing between a bank statement loan and a conventional mortgage loan, you must find the best fit for your financial situation.

Baldocchi recommends getting a conventional mortgage if you have a steady job and can easily prove your income with tax returns. These tend to come with lower rates, which means more money toward your dream home. He explained, “Bank statement qualification is wonderful for borrowers who need it. But if [they] have the option for a standard W-2 qualification, it’ll generally be the lower-cost route. Principle, interest, taxes, and insurance (PITI) will almost always be higher on a bank statement product simply because the interest rates are typically higher.”

But if you’re self-employed or have a more complex income, bank statement loans can be helpful. Just keep in mind, “The fee on bank statement loans is higher than conventional loans by at least one point of the loan amount. So using an $800,000 loan amount, the cost would be an estimated $8,000 — pricing and rates change daily,” said Veronica.

Bank statement loan requirements

If you’re leaning toward a bank statement loan, you’ll need to meet certain requirements to qualify.

Here’s what lenders typically look for, according to Veronica:

  • One to two years of bank statements to prove your income
  • A clear explanation for any large deposits or withdrawals in your bank statements
  • A credit score of 640 or higher to show you’re a responsible borrower
  • A debt-to-income (DTI) ratio below 45% to 50% to ensure you can comfortably afford the mortgage payments
  • A downpayment of at least 10% to 20% of the purchase price, depending on the lender
  • Proof of cash reserves to cover several months of mortgage payments, just in case
  • Your business license and other related documents

Requirements vary from lender to lender. Once you find one you like, ask them what theirs are — they may differ from the above.

close up of two people exchanging a written contract

Source: Andrea Piacquadio

What are some alternatives to bank statement loans?

Don’t fret if a bank statement loan doesn’t quite fit your needs.

Here are a few alternative loan types that might be a better match:

Asset depletion loans

Asset depletion loans are excellent if you have significant savings or investments, but don’t have a steady income stream. People with many assets or retirees with low verifiable income may opt for this loan type.

With asset depletion loans, lenders view assets as an income source, such as:

  • Certificate of deposits
  • Checking or savings accounts
  • Investment accounts (e.g. stocks, bonds, mutual funds)
  • Money market accounts
  • Retirement accounts (e.g. 401K or IRA)

This allows you to qualify based on your overall financial picture. Like bank statement loans, asset depletion loans often have higher interest rates than traditional mortgages.

Conventional loans

Conventional loans are the most common mortgage type. They’re best for borrowers with stable incomes and good credit. These loans usually require a downpayment of at least 3% and offer competitive interest rates. If you have a steady job and can easily prove your income with tax returns and W-2s, try qualifying for a conventional loan first.

FHA loans

Backed by the Federal Housing Administration, FHA loans help borrowers with lower credit scores or limited downpayment funds. They let you put down as low as 3.5% and have more lenient credit requirements than conventional loans. But FHA loans come with extra fees like mortgage insurance premiums.

Home equity loans

Already have a home and built-up equity? A home equity loan could be a solid option for financing a new property. With this type of loan, you borrow against the equity in your current home to buy a new one. Home equity loans may offer lower interest rates than other loan types. But be careful — you risk losing your current home if you can’t make the payments.

Interest-only loans

Interest-only loans let you pay only the interest portion of your mortgage for a set period — usually five to 10 years. After that, you’ll pay both principal and interest. While interest-only loans offer lower initial payments, you won’t build equity in your home during the interest-only period.

Owner financing

Owner financing, also known as seller financing, is when the seller of a property agrees to act as the lender. They’d let you make payments directly to them instead of a traditional lender. This option can work well if you don’t qualify for a conventional mortgage. However, always review the agreement terms and ensure both parties are protected.

Portfolio loans

Portfolio loans are mortgages held by the lender instead of being sold to investors on the secondary market. Because lenders can set their own terms and guidelines for portfolio loans, they may be more flexible on qualifications and loan features. The drawback with this loan type is it comes with higher interest rates and fees.

VA loans

Eligible military service members, veterans, and their surviving spouses may get VA loans to secure a mortgage. These offer competitive interest rates, no downpayment requirements, and no private mortgage insurance. But borrowers must meet specific service requirements and pay a funding fee to qualify.

Frequently asked questions

What are my chances of getting a bank statement loan?

Your chances of getting a bank statement loan are good if you find a lender that offers this type of financing. A realtor may connect you with a specialized lender if you don’t know who to talk to. You should get approved as long as your bank statements show enough income and you meet other requirements.

Are there income requirements for a bank statement loan?

Income requirements depend on the loan amount you need. Lenders will check your average monthly income on bank statements to ensure you can cover the mortgage and other debts. You can expect higher loan amounts to require higher income levels.

Do I need a business checking account to qualify for a bank statement loan?

A business checking account is preferable when applying, as it helps lenders separate your business and personal expenses. But some lenders may still approve you with only a personal account. Check with your lender to understand their guidelines.

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