Key Takeaways

A bank statement loan allows you to qualify for a mortgage using bank statements instead of tax returns, making it ideal for self-employed borrowers. Not all mortgage lenders offer bank statement loans, so you may need a mortgage broker to find one. If you qualify for a conventional or government-backed loan, those options are generally more advantageous.

Understanding Bank Statement Loans

For self-employed individuals or gig workers looking to purchase a home, a bank statement loan can be a useful solution. Instead of using traditional income verification methods like pay stubs or tax returns, this loan relies on your bank statements for mortgage preapproval.

What is a Bank Statement Loan?

A bank statement loan allows you to apply for a mortgage without proving your income via traditional documents such as pay stubs, W-2s, or tax returns. Instead, lenders use your recent bank statements to assess your earnings. This type of loan is particularly beneficial for those with inconsistent income, no traditional paychecks, or significant tax deductions. This includes self-employed individuals, small business owners, doctors, lawyers, real estate agents, and investors. For instance, if your tax returns show an income of $100,000 due to deductions for a large purchase like a printing machine, but your actual earnings were $200,000, your bank statements can better reflect your true income.

How Non-QM Loans Relate to Bank Statement Loans

Bank statement loans fall under the category of non-qualified mortgages (non-QM), which are considered riskier than typical mortgages and are not backed by Fannie Mae or Freddie Mac. These loans don't meet the conforming standards set by these entities, making them less protected for both lenders and borrowers. Non-QM loans cater to borrowers who don't qualify for traditional loans. They generally have higher interest rates and lack some consumer protections, such as negative amortization and balloon payments.

How Do Bank Statement Loans Work?

To apply for a bank statement loan, you'll need to provide the lender with up to two years' worth of bank statements, including personal and business accounts. You will also need to disclose information about your business and expenses if applicable. Lenders analyze your income based on these statements to determine your net income. If you meet the lender’s criteria, you’ll be preapproved for a certain loan amount.

Example of a Bank Statement Loan

Imagine you’re self-employed with a credit score of 740, looking to buy a home. Your monthly income averages $6,875, and you have $800 in monthly debt payments. If the lender allows a debt-to-income (DTI) ratio of up to 45%, you could qualify for a mortgage with a monthly payment around $2,295. This amount will vary based on current mortgage rates, your down payment, and other factors.

Bank Statement Loan vs. Traditional Mortgage

Traditional mortgages like conventional or FHA loans are more common and cater to borrowers with consistent, verifiable income documented on pay stubs and tax returns. These loans typically offer better terms and lower down payments. Conversely, bank statement loans cater to those with non-traditional income and usually have different eligibility requirements and higher costs.

Requirements for Bank Statement Loans

To qualify for a bank statement loan, you'll generally need:

• Two years of bank statements

• A profit and loss statement for your business

• At least a 10% down payment

• Adequate cash reserves

• A credit score of at least 620 (700+ preferred for better terms)

• A DTI ratio of 45% or lower (some lenders allow higher)

• Business licenses and other related documents

Should You Get a Bank Statement Mortgage?

A bank statement mortgage might be right for you if your tax returns don't accurately reflect your income. Many self-employed individuals can still qualify for traditional mortgages despite inconsistent income. However, if you heavily utilize tax write-offs or have unique income situations, a bank statement loan might be the better option.

Good Candidates for a Bank Statement Mortgage

• Self-employed individuals

• Freelancers

• Small business owners

• Entrepreneurs

• Gig workers

• Full-time real estate investors

Pros and Cons of Bank Statement Mortgages

Pros:

• Flexibility: Suitable for those with non-traditional income.

• Accessibility: Some lenders accept credit scores as low as 620.

• Potential for Higher Loan Limits: Can exceed conventional loan limits.

Cons:

• Higher Borrowing Costs: Expect higher interest rates.

• Larger Down Payment: Typically requires at least 10% down.

• Prepayment Penalties: May include penalties for early repayment.

How to Apply for a Bank Statement Loan

If your current mortgage lender doesn’t offer bank statement loans, a mortgage broker can help you find one. Brokers have access to a variety of lenders and unique loan options.

Steps to Apply:

1. Get Preapproved: Discuss your situation with loan officers to get preapproved and understand potential loan terms.

2. Compare Offers: Look at estimated closing costs, APRs, and other fees from different lenders.

3. Submit Application: Gather necessary documents and formally apply for the loan with your chosen lender.

Learn More: Entire Pre-Approval Process Simplified.

Alternatives to Bank Statement Loans

Consider these alternatives if bank statement loans are not suitable:

• Conventional Loans: Offer better rates and terms if you have traditional income documentation.

• FHA Loans: Good for first-time homebuyers with flexible qualification criteria.

• VA Loans: Available to eligible service members, veterans, and surviving spouses with no down payment.

• Asset Depletion Loans: Use significant assets to qualify, though they can be costly.

• DSCR Loans: Ideal for real estate investors based on portfolio cash flow.

• Interest-Only Loans: Pay only interest for the initial period, but watch out for higher future payments.

• Portfolio Loans: Flexible qualifying standards but usually reserved for high-value customers.

Learn More: What are Non-QM loans?

In summary, bank statement loans offer a viable solution for those with non-traditional income but come with higher costs and requirements. Weigh your options carefully to determine the best mortgage solution for your situation.