Bank Statement Loans

Welcome to your comprehensive guide on Bank Statement Loans, the innovative mortgage solution designed for self-employed individuals and business owners. As a seasoned mortgage professional, I'm here to walk you through everything you need to know about this unique financing option.

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What Are Bank Statement Home Loans?

Bank statement loans are non-QM loans that allow borrowers to qualify based on their bank statements rather than traditional tax returns. This alternative income mortgage product is particularly beneficial for self-employed individuals, freelancers, and business owners who may have complex income structures or write-offs that don't accurately reflect their true earnings or lifestyle.

Self-employment rates vary across the country with some regions showing higher concentrations of self-employed persons. California leads, followed by Florida, New York, Colorado, and Texas. These states are known for industries that attract self-employed professionals who might benefit from bank statement mortgages.

Who this loan helps

We have helped finance a variety of small business owners, corporate officers and independent contractors which includes:

Loan guidelines state if you own 25% or more of a business OR if you receive a 1099 you are considered self-employed and eligible in the eyes of a bank statement lender.

Why Consider A Bank Statement Mortgage Loan?

Many self-employed individuals face challenges when attempting to obtain traditional mortgages due to income documentation that reduces their monthly income. Bank Statement Loans provide a pathway to homeownership or refinancing by evaluating actual cash flow rather than taxable income.

Eligibility Requirements for a Bank Statement Loan

To qualify for a Bank Statement Loan, you must meet specific criteria:
 – Credit Score: Most lenders require a minimum credit score of 640 with more favorable rates and terms available for scores above 680.
 – Self-Employment History: You must have at least 2 years. Some lenders may allow 1 year of self-employment with recent work experience in the same industry.
 – Account Types: You may use personal checking or business checking account statements.
 – Down Payment: You should expect to provide a down payment of 10-20%.
 – Income Calculation: Lenders determine your income with an expense factor on the deposits to estimate your net income.

How Bank Statement Loans Are Calculated

These mortgage loans use a unique method to determine a borrower's income. Here's an in-depth example of how lenders calculate income for these loans.

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Bank Statement Loan Calculator

Use  our calculator to see what you can afford.

Example Calculation:

Let's consider a self-employed consultant named John who's applying for a Bank Statement Loan.

  1. Bank Statement Analysis:
    • John provides 12 months of business bank statements.
    • Total deposits over 12 months: $180,000
  2. Expense Factor Application:
    • Lender applies a 50% expense factor (this can vary by industry and lender).
    • $180,000 x 50% = $90,000 (estimated business expenses)
  3. Net Income Calculation:
    • Gross Deposits: $180,000
    • Minus Estimated Expenses: $90,000
    • Net Income: $90,000
  4. Monthly Income Determination:
    • $90,000 ÷ 12 months = $7,500 per month
  5. Debt-to-Income (DTI) Ratio:
    • John's monthly debts: $2,500
    • Proposed mortgage payment: $3,000
    • DTI Calculation: ($2,500 + $3,000) ÷ $7,500 = 73.33%
  6. Loan Qualification:
    • If the lender's maximum DTI is 50%, John would need to either increase his income or decrease his debts to qualify.
Read about potential concerns

Common Challenges

Strict Underwriting Guidelines for Housing Payment History

  1. Perfect Payment Record Requirement:

    Many lenders require a perfect 12 or 24-month housing payment history for Bank Statement Loans. This means no late payments on rent or current mortgage for the past year. Even a single 30-day late payment could result in loan denial.

  2. Verification Challenges:

    For renters, lenders often require 12 months of cancelled rent checks or bank statements showing consistent rent payments. This can be problematic for those who pay in cash or have informal rental arrangements.

Large Deposit Documentation Requirements

Large deposits outside of regular income patterns can raise red flags for lenders. To resolve this:

  1. Provide a clear paper trail:

    Document the source of any large deposits with a copy of the check, closing settlement statements, bank statements, investment account statements, or sale receipts.

  2. Explain business cycles:

    If large deposits are due to seasonal business fluctuations, provide a written explanation and previous years' statements to show the pattern.

  3. Avoid depositing cash gifts:

    Large cash deposits are difficult to document. If receiving a gift, ask the donor to wire the funds directly to your account.

Explaining Unusual Account Activity

Examples of unusual account activity that may require explanation:

  1. Overdrafts or NSFs (Non-Sufficient Funds):

    Multiple overdrafts or NSFs can indicate financial instability. Lenders may require an explanation for more than one or two instances in a 12-month period.

  2. Large withdrawals:

    Significant withdrawals that don't align with normal business operations may need explanation. For instance, a $45,000 withdrawal from a business account that typically has $5,000-$10,000 transactions.

  3. Irregular deposit patterns:

    Deposits that don't follow a consistent pattern might raise questions. For example, if a business typically deposits $5,000-$7,000 weekly, but suddenly has a month with no deposits followed by a $50,000 deposit.

  4. Transfers between personal and business accounts:

    Frequent transfers between personal and business accounts can complicate income calculations and may require detailed explanations.

  5. Second person on bank account

    Your account statements may not have a non-borrowing person as an account owner. This creates confusion on which is income is yours and which is the other account holder's income or deposits. It's a common underiting rule where they are not flexible. I've tried many times with great explanations such as it's my child or grandmother.

To address these issues, borrowers should be prepared to provide written explanations and supporting documentation for any unusual activity. In some cases, lenders may exclude certain deposits or time periods from income calculations if satisfactory explanations cannot be provided.

Bank Statement Down Payment Guidelines

If you want to make a low down payment and fall within these guidelines, we encourage you to apply or contact us.

Loans under $2 million

  • Credit scores 720 and up:  10% down
  • Credit scores 680-719:  10-15% down
  • Credit scores 660-679:  25% down
  • Credit scores 640-659:  30-35% down

6 months reserves for 720+
9-12 months PITI below 720 credit
Loans $2mil-$3 million

  • Credit scores 720 and up:  10% down
  • Credit scores 680-719:  20% down
  • Credit scores 660-679:  30% down
  • Credit scores below 659:  N/A

9 months reserves for 720+
12 months PITI below 720 credit
Loans $3mil-$4 million

  • Credit scores 760 and up:  20%-25% down
  • Credit scores 680-719:  25% down
  • Credit scores 660-679:  30% down
  • Credit scores under 680:  N/A

12 months reserves for 720+
12-18 months below 760 credit
Loans $4mil-$5 million

  • Credit scores 760 and up:  25% down
  • Credit scores 740-759:  25-30% down
  • Credit scores 680-739:  35% down
  • Credit scores under 680:  N/A

18 months reserves for 720+
18-24 months below 739 credit

Note: These requirements apply to both purchase and most refinance transactions. A bank statement refinance with cash out is capped at 85 LTV and credit scores must be over 680. As the loan amount increases, higher credit scores, larger down payments, and more cash reserves are generally required. Guidelines above are subject to change.

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The Bank Statement Loan Application Process

The application process involves several steps whether a refinance or purchase:

Bank Statement Loan Mortgage Rates and Terms

Interest rates for Bank Statement Loans are typically higher than those of conventional mortgages due to the increased risk associated with non-traditional income verification. How much higher? They're approximately .75%-1.50% higher depending on your credit score, loan amount, and loan-to-value ratio (LTV). The best rates I see tend to be at 70 LTV and less.

Loan Term Options:

How to Lock in the Best Bank Statement Loan Rate

To obtain the most favorable interest rate on this self-employed mortgage:

  1. Improve your credit score before applying
  2. Aim for a lower loan-to-value ratio by making a larger down payment than a low down payment of 10%-15%
  3. Negotiate with the seller to credit you 1-2% for closing costs which may be used to pay discount points to reduce the rate
  4. Compare offers from other bank statement lenders

Choosing the Right Bank Statement Loan Lender

When selecting a lender for a bank statement home loan, you should consider:

  • Program variations in income & expense factor calculations
  • Interest rates, fees and closing credit
  • Customer reviews and reputation
  • Experience with self-employed borrowers

It is crucial to work with a loan originator like myself who understands the unique needs of self-employed individuals and has a track record of successfully closing non-QM loans.

Bank Statement Loan Alternatives

While Bank Statement Loans are excellent options for many self-employed borrowers, alternatives do exist:

  • No Ratio Loans: These loans don't require income or employment but do require a 20% or higher down payment and higher credit scores.
  • Asset Depletion Loans: This product utilizes your qualifying liquid asset balance(s) to calculate the ability to repay the loan.
  • P&L Loans: These loans require 1-2 years of your profit & loss statements prepared by a CPA, CTEC, EA, or tax attorney.
  • 1099 Worker Loans: These loans require 1-2 years of your 1099 statements. Ideal for freelancers, consultants and gig workers.

Success Stories: Bank Statement Loans in Action

California Tech Entrepreneur:

Sarah, a successful app developer in Silicon Valley, used a Bank Statement Loan to purchase her home in San Francisco. Despite her high income, her tax returns didn't reflect her true earning potential due to business deductions. The Bank Statement Loan allowed her to qualify based on her actual cash flow, securing a $1.2 million mortgage with a 15% down payment.

Texas Small Business Owner:

Mike, who owns a food truck business in Austin, turned to a Bank Statement Loan when he wanted to buy his first home. His seasonal income made traditional qualification difficult, but by using 24 months of business bank statements, he secured a $350,000 mortgage with competitive terms.

Exploring Your Bank Statement Home Loan Options

Self-employed individuals or business owners looking to purchase or refinance a home should consider a Bank Statement Loan as a potential solution. Complex tax situations need not prevent the achievement of homeownership goals.

Contacting a mortgage advisor to discuss individual situations is the first step towards finding a Bank Statement Loan that fits specific needs.

It is important to note that every borrower's situation is unique, and what works for one may not be the best option for another. Consultation with a qualified mortgage professional is essential to determine the most suitable loan product for specific circumstances.

Why Work With an Expert in Self-Employed Mortgage Loans?

As a licensed mortgage professional with years of experience in non-QM loan products, I specialize in helping clients such as yourself find the right solution. Bank statement mortgage loans are ideal for self-employed borrowers with regular monthly income deposits.

Still have questions about this loan product?    Check these answers


Disclosure: Minimum loan amount is $200,000 for residential non-QM loans. Loan guidelines are subject to change per lender at any time until the loan is approved and the rate is locked. Borrowers must be approved by underwriting. Not all applicants will qualify.