Everything You Need To Know About Bank Statement Mortgage Loans

Purchasing a home is a major financial milestone. But for self-employed borrowers or those with non-traditional income sources qualifying for a mortgage can be challenging. Bank statement loans offer a potential solution by approving borrowers based on bank account deposits rather than tax returns or pay stubs.

In this comprehensive guide, we’ll explain what bank statement loans are, who they are best suited for, eligibility requirements, pros and cons, and tips for securing financing.

What Are Bank Statement Loans?

Bank statement loans, also known as asset depletion loans, allow borrowers to qualify for a mortgage by documenting income using personal and business bank account statements rather than tax returns or pay stubs.

These non-traditional mortgages cater to

• Self-employed individuals
• Business owners
• Gig economy workers
• Real estate investors
• Borrowers with inconsistent income

Lenders analyze deposits coming into your accounts to assess your income and ability to repay the loan. Bank statement loans fall under the category of non-qualified mortgages and are considered higher risk.

Who Are Bank Statement Loans Best For?

Bank statement mortgage loans are tailored for borrowers whose income doesn’t fit the mold of traditional employment. Here are some examples of ideal candidates:

• Self-employed – You write off many business expenses lowering your taxable income. Bank statements better reflect your true earnings.

• Business owners – If you own multiple businesses or have complex corporate structures, your personal tax returns may not show your full income stream.

• Gig workers – Income from freelance and side jobs may not be documented well on taxes. Bank statements provide clearer income data.

• Real estate investors – If you rely on rental property income, bank statements can validate this even if tax returns show losses.

• Inconsistent income – If you have commission-based earnings or seasonal income, bank statement loans consider your total income, not just the tax return snapshot.

• Alternative income sources – Income not evidenced on pay stubs or 1099s can be validated through consistent bank deposits.

Requirements for Qualifying

Bank statement loan programs have unique qualification criteria compared to conventional mortgages. Here are typical requirements:

• 6 months of personal and business bank statements

• Minimum credit score of 620

• Debt-to-income ratio below 50%

• At least 10% down payment

• Sufficient cash reserves – often 12-24 months’ worth

• No bankruptcies or foreclosures in past few years

• Documentation of all income sources

• Tax returns may still be required in some cases

Expect enhanced scrutiny of your credit report, income, expenses, and assets. Having a down payment above 20% improves your chances of approval and secures a better interest rate.

Pros and Cons of Bank Statement Loans

Bank statement mortgages have potential advantages but also come with notable drawbacks to weigh.

Pros

• Provide mortgage access to borrowers with non-traditional income sources
• Can qualify solely based on bank statement deposits
• May offer higher borrowing limits than conventional loans
• Down payments as low as 10% on some programs

Cons

• Typically have significantly higher interest rates
• Require large down payments and cash reserves
• Often have prepayment penalties
• Less consumer protections than conventional loans
• Harder to qualify for refinancing later on

Carefully assess the pros and cons before pursuing this route. Conventional loan options tend to offer better terms if you can qualify.

How to Get a Bank Statement Mortgage Loan

Follow these steps when seeking a bank statement home loan:

1. Find a lender – Connect with a mortgage broker to locate bank statement loan lenders. Not all lenders offer these non-QM loans.

2. Get pre-approved – Provide bank statements, tax returns if applicable, and other documentation to get pre-approved and confirm potential loan amount.

3. Compare options – Review pre-approvals from multiple lenders and compare interest rates, fees, and terms. Make sure to ask about prepayment penalties.

4. Formally apply – After selecting your lender, formally apply for the mortgage loan. Be prepared to provide extensive financial records.

5. Lock rate and close – Work quickly once approved to lock your interest rate and close on the home purchase or refinance. Rates on bank statement loans can fluctuate significantly.

Alternatives to Bank Statement Mortgage Loans

Here are some alternatives to consider before pursuing a bank statement loan:

• Conventional loans – If possible, start with trying to qualify for conventional financing which offers better rates and terms overall.

• FHA loans – Government-backed FHA loans are a good option for those with lower credit scores or looking to put down as little as 3.5%.

• VA loans – For eligible veterans, active-duty military, and surviving spouses, VA loans offer 0% down financing.

• Family loans – Borrowing from family members instead of a bank could provide mortgage funding without the high costs.

• Asset depletion loans – These loans base approval on your assets rather than income, so may be an alternative if you have significant savings but low income.

• Hard money loans – Hard money loans are easy to obtain but come at a very high cost.

The Bottom Line

Bank statement loans open mortgage financing to borrowers who don’t have traditional income sources or W-2 earnings. However, costs and qualification criteria are less favorable compared to conforming loans. Weigh all your options, and only use a bank statement mortgage if it truly aligns with your situation.