Bank statement loan: What is it and who should get one?

If you’re self-employed or a gig worker looking to buy a home, a bank statement loan might help. With this loan, you use bank statements rather than tax returns for mortgage preapproval.

What is a bank statement loan?

A bank statement loan allows you to apply for a mortgage without having to prove your income via pay stubs, W-2s or tax returns. Instead, lenders use recent bank statements to assess your earnings.

This loan type can be helpful if your income is inconsistent, your employer doesn’t issue traditional paychecks or you claim significant tax deductions. This might apply if you’re self-employed or a small business owner, doctor, lawyer, real estate agent or investor.

“One example would be if your tax returns show that you made $100,000 last year when you really made $200,000 because you were able to deduct an expensive printing machine you bought,” says Brad Seibel, president of Sage Home Loans Corp. “Your bank statements, rather than your tax returns, would adequately show your income.” (Editor’s note: Sage Mortgage is owned by Bankrate parent company Red Ventures.)

How non-QM loans relate to bank statement loans

Bank statement loans are considered riskier than typical mortgages, and many banks and mortgage lenders don’t offer them. That’s because they’re non-qualified mortgages (non-QM), meaning they aren’t backed by Fannie Mae and Freddie Mac, so there’s less protection for lenders and borrowers.

Non-QM mortgages include any loan that doesn’t meet the conforming standards set by Fannie and Freddie. These standards cover characteristics like the maximum loan amount and debt-to-income (DTI) ratio.

Non-QM loans allow more borrowers to qualify for a loan. However, they tend to have higher interest rates, meaning they cost more. They also lack some of the consumer protections that conforming loans have. For example, a non-QM loan could negatively amortize or include a balloon payment.

How do bank statement loans work?

When you apply for a bank statement loan, you’ll provide the lender with bank statements as far back as two years. This includes statements for personal and business accounts. You’ll also need to disclose other information about your business and expenses, if applicable.

“The type of business, the number of employees and whether the business has a physical location are some of the questions that bank statement lenders will want to know to decide the expense factor,” says Darrin Seppinni, president of HomeLife Mortgage, a California-based lender specializing in bank statement loans.

The lender then analyzes your income to determine your net income. From there, if you meet the lender’s other requirements, you’ll be preapproved for a certain loan amount.

Bank statement loan example

Let’s assume you’re self-employed, have a credit score of 740 and want to purchase a home. Your income fluctuates month to month, averaging out to $6,875. You also put $800 a month toward other debt payments. If the lender allows a DTI ratio of up to 45 percent, you could potentially qualify for a mortgage with a monthly payment of about $2,295. The exact number will vary widely based on current mortgage interest rates, your down payment and other factors.

Bank statement loan vs. traditional mortgage

Traditional mortgages, such as 30-year fixed-rate conventional or FHA loans, are more common than bank statement loans. They are geared toward borrowers with consistent, verifiable income documented on pay stubs, W-2s and tax returns. You can get approved for a conventional loan with a down payment as low as 3 percent and a minimum 620 credit score.

However, bank statement loans are far less common. They cater to self-employed borrowers or those with inconsistent income. Typically, they come with eligibility guidelines that differ from traditional mortgages.

Bank statement loan requirements

Generally, you can qualify for a bank statement loan with a credit score as low as 620, but 700 or higher gets you a better rate and terms. If your credit score is on the lower end, though, you might also need to make a larger down payment. Doing so lowers the risk posed to the lender.

Overall, expect to meet the following requirements:

• Provide two years’ worth of bank statements
• Provide a profit and loss statement for your business
• Make at least a 10 percent down payment
• Have adequate cash reserves
• Have a credit score of at least 620
• Have a DTI ratio of 45 percent or lower (some lenders allow a higher percentage)
• Provide business licenses, organization documents and other related paperwork

Should you get a bank statement mortgage?

A bank statement mortgage loan might be right for you if your tax returns don’t adequately reflect your income. Fact is, many self-employed workers are eligible for other, more traditional types of mortgages, even with inconsistent income. Given that bank statement loans have considerable downsides, it’s crucial to carefully consider all options. Ultimately, you want to try a conventional loan first.

But there are scenarios where it might make more sense to get a bank statement loan, such as if you’re self-employed and heavily use tax write-offs to minimize your adjusted gross income (AGI). Or maybe you’re a small business owner who acquires new businesses, but your personal income taxes are significantly reduced due to large one-time payments.

Borrowers like these will likely face challenges when seeking a conventional or jumbo mortgage loan. But a bank statement loan offers a viable solution, as it assesses income based on bank statements rather than AGI from tax returns or pay stubs.

Good candidates for a bank statement mortgage include:

• Self-employed individuals
• Freelancers
• Small business owners
• Entrepreneurs
• Gig workers
• Full-time real estate investors

You might also consider a bank statement loan if your income can’t be documented in a traditional way. For example, some employers pay workers via prepaid cards instead of direct deposit.

Bank statement loans give non-traditional income earners the chance to buy a home. Still, they aren’t without drawbacks. Weigh the pros and cons when deciding if this mortgage option is right for you.

How to apply for a bank statement loan

If you aren’t already working with a mortgage lender who offers bank statement loans, a mortgage broker might be able to help you find one. Brokers often have partnerships with several wholesale lenders, which gives them access to various unique mortgages and deals.

Brokers typically don’t charge borrowers for their services. Instead, they charge the lender, who then passes the cost onto you in the form of fees or a higher rate.

When comparing brokers, ensure whoever’s on your shortlist is licensed to work in your state and has experience with bank statement loans. Once you choose the right fit, connect with them to explore lenders that can assist you with securing a bank statement loan.

With a shortlist of lenders in hand, here’s how to move forward:

• Step 1: Get preapproved. Connect with loan officers to discuss your situation and get preapproved. Doing so will give you an idea of the loan terms and how much you might be able to borrow.
• Step 2: Compare loan offers. When comparing loan options from your top lenders, look carefully at estimated closing costs, APRs and other fees to choose the loan with the best terms that also suit your needs.
• Step 3: Formally apply for a loan. Gather all the necessary information and documents needed to apply for a bank statement loan with the lender you select.

Alternatives to bank statement loans

Bank statement loans are one way for people to borrow money, but there are other mortgage loan options. Unlike bank statement loans, these options typically don’t require years of financial records and are typically less expensive to get. These alternatives include:

• Conventional loans: Conventional loans are available through virtually every mortgage lender. They tend to offer much better interest rates and terms compared to bank statement loans. Simply put, “if you have pay stubs, it’s a much better deal to submit pay stubs,” says Seibel.
• FHA loans: FHA loans are especially popular among first-time homebuyers due to their flexible qualification criteria.
• VA loans: Eligible service members, veterans and surviving spouses can obtain a VA-backed mortgage with no money down.
• Asset depletion loans: If you have no income but significant assets, a lender might be able to use those assets to qualify you for a mortgage. These types of loans are costly, however — it might make more sense to sell some assets to get the funds to buy a home.
• DSCR loans: If you’re a real estate investor, you might qualify for a debt service coverage ratio (DSCR) loan, which is based on your portfolio’s cash flow and how that relates to your ability to repay the mortgage. Keep in mind that when calculating the DSCR, lenders tend to be conservative and account for higher expenses and a vacancy rate.
• Interest-only loans: With this type of loan, you’ll only pay interest for the first few years of the loan’s term, then pay principal and interest. This keeps your costs low for a while, but you also won’t build any equity during the intro period, and you might not be able to afford the principal and interest payments once they kick in.
• Portfolio loans: When a lender issues a portfolio loan, it retains that loan in its portfolio versus offloading it on the secondary mortgage market. Because of this, these types of loans have more flexible qualifying standards. They aren’t always advertised, however, and are typically reserved for high-value customers or those who already have a relationship with the lender. If you’re an investor, consider maintaining your bank accounts with a portfolio lender. This can give you a leg up when you need a mortgage.

Bank statement loans FAQ

• Is it hard to get a bank statement loan?

  It might be challenging to find a bank statement loan lender, but it’s not impossible. Some even specialize in this type of loan. If you can provide bank statements to prove your income and meet the lender’s other guidelines, getting approved might not be difficult at all.

• How much income do you need for a bank statement loan?

  It depends on the loan amount you’re seeking. You’ll need enough funds to cover the minimum down payment and closing costs, as well as some reserves in your accounts. Learn more about how much of your income should go to a mortgage.