Bank Statement Loan Mortgages: A Complete Guide

Bank statement loans, also known as bank statement mortgages, are a type of non-traditional mortgage that allows borrowers to qualify based on their bank account deposits rather than income verified through tax returns or pay stubs. These loans can be a good option for self-employed borrowers or those with irregular income In this comprehensive guide, we’ll cover everything you need to know about bank statement loan mortgages

What is a Bank Statement Loan Mortgage?

A bank statement loan mortgage, sometimes called a bank statement mortgage, allows borrowers to qualify based on the deposits shown in their bank account statements rather than traditional income documentation like W-2s and tax returns.

With a traditional mortgage, lenders want to see stable verifiable income over the last couple years. This can be difficult for self-employed borrowers or those with irregular income streams. A bank statement loan looks at your average monthly bank deposits over 12-24 months to assess your income.

As long as your bank statements show regular deposits that are adequate to cover your proposed mortgage payment and other debts you may be able to qualify even without traditional income documentation.

How Do Bank Statement Loan Mortgages Work?

Here’s an overview of how the bank statement loan mortgage process works:

• Provide bank statements – You’ll need to provide 12-24 months of personal and business bank statements to establish your income.

• Verify deposits – The lender will review all deposits and verify any large or irregular deposits. Gifts and non-income deposits may be excluded.

• Calculate average – The lender will calculate your average monthly deposits over the period to determine your qualifying income. Some lenders may apply a discount factor.

• Assess ability to repay – The lender will look at your total monthly debts along with the proposed mortgage payment to ensure your income is adequate to repay the loan.

• Underwrite and verify – The lender will underwrite the loan and verify all application details. Some lenders may ask for additional statements.

• Close mortgage – With approval, you’ll close on the mortgage just like any other purchase or refinance loan.

Pros and Cons of Bank Statement Loan Mortgages

Bank statement loan mortgages have some advantages but also some potential drawbacks to consider.

Pros

• More options for self-employed – The main benefit is providing more options for borrowers without traditional W-2 income.

• Uses actual income – For irregular income, bank statements may better reflect true earnings.

• Lower requirements – Minimum credit scores around 620 and as little as 10% down payment.

Cons

• Higher rates and fees – Bank statement loans involve more risk for lenders, so they charge higher rates.

• Large down payment – While 10% is possible, many lenders want 20-25% down or more.

• Limited availability – Not all lenders offer these non-QM mortgages.

• Refinancing difficult – Most can’t be refinanced into lower rate conventional loans.

Who Should Consider a Bank Statement Loan Mortgage?

Bank statement loan mortgages are best suited for certain types of borrowers:

• Self-employed – Business owners, entrepreneurs, contractors, freelancers.

• Alternative income – Real estate investors, beneficiaries, commissioned sales agents.

• Irregular income – Seasonal workers, tip earners, gig economy workers.

• Recent changes – Those with income declines due to COVID-19 or other circumstances.

• Unable to document – Paid in cash, issue providing tax returns, new businesses.

You’ll get the best terms if you have a credit score over 700, at least 20% down payment, and healthy reserves. But many lenders offer programs starting at 620 FICO and 10% down.

Where To Get a Bank Statement Loan Mortgage

Not all mortgage lenders offer bank statement loan programs. Here are some options to consider:

• Mortgage brokers – An experienced broker can help you find bank statement loan options.

• Online lenders – Some fintech lenders like SoFi and Lending.com offer these loans.

• Credit unions – Local credit unions are a good place to find more flexible lending options.

• Portfolio lenders – Smaller banks that keep loans “in-house” rather than selling to the secondary market.

• Non-QM lenders – Specialty lenders like Angel Oak, Athas Capital, and Citadel Servicing offer non-QM mortgages.

Getting pre-approved by multiple lenders is suggested so you can compare options. A good broker is invaluable for finding the best bank statement loan for your situation.

What are the Requirements for a Bank Statement Loan Mortgage?

While requirements vary by lender, here are some typical eligibility guidelines:

• Minimum 620 credit score (700+ better)
• 10-25% down payment
• Bank statements documenting adequate income
• DTI around 45% or lower
• 3-6 months reserves recommended
• No bankruptcies or foreclosures recently
• Business license and organizational docs if self-employed

Strong credit and a larger down payment can help you get approved and improve your interest rate. Providing explanations for any irregular deposits or fluctuations in income is also important.

What Documents Do You Need for a Bank Statement Mortgage?

In addition to a standard mortgage application, bank statement loans require:

• 12-24 months personal bank statements
• 12-24 months business bank statements (if self-employed)
• Profit and loss statement if self-employed
• Federal tax returns
• Explanations for non-income deposits or income fluctuations
• Business license(s)
• Organizational documents if incorporated

Having clean, easy-to-read statements without unrelated or temporary deposits is ideal. Expect lenders to scrutinize your records, so keeping an eye on your accounts in the months leading up to your application is wise.

How Much Does a Bank Statement Loan Mortgage Cost?

Bank statement mortgages involve more risk for lenders, so costs are higher than conventional loans:

• Interest rates – Expect rates 0.5 to 2% or more higher than comparable conventional mortgages.

• Points – Most lenders charge 1 to 3 points to lower the interest rate.

• Fees – Application fees around $400-$500 are common, along with standard closing costs.

• Mortgage insurance – Private mortgage insurance may be required at higher rates if less than 20% down.

While costly, the rates can still be reasonable considering they provide an option those unable to qualify for other mortgages. Shopping multiple lenders is key to optimizing your rate.

Alternatives to Bank Statement Loan Mortgages

If you don’t want to go the bank statement route, here are a few other options that provide more flexible guidelines than conventional mortgages:

• FHA loans – Require only 3.5% down and have high debt-to-income allowances.

• VA loans – Offer 0% down financing to qualifying military borrowers.

• USDA loans – Have 0% down options for low income borrowers in rural areas.

• Portfolio loans – Check local banks for custom “portfolio” loans they keep in-house.

• Investor loans – Options like DSCR loans exist for real estate investors.

• Alternative docs – Programs that use bank statements along with other documentation.

• Co-signers – Adding a co-signer with better credit or income may help you qualify.

Explore all avenues before resorting to a bank statement loan mortgage, as conventional financing is always preferable when possible.

The Bottom Line

Bank statement loan mortgages can provide a pathway to homeownership for those unable to qualify through traditional means. By using your bank account deposits to document income, it offers more flexibility. However, you’ll pay a price with higher rates and costs. Conventional mortgages or government-backed loans should be pursued first if possible. But for the right borrower, a bank statement loan mortgage can make sense when options are limited.