Bank statement loans are becoming an increasingly popular option for borrowers who don’t have the traditional income documents required for a regular mortgage. But how exactly do these unique loans work? This comprehensive guide will explain everything you need to know about bank statement loans, including who they are best suited for, what the requirements are, and how the application process works.
What is a Bank Statement Loan?
A bank statement loan, sometimes called a non-qualified mortgage, allows borrowers to qualify for a home loan based on their bank account deposits rather than income tax returns or paystubs. This type of financing is designed for self-employed individuals or those with non-traditional income sources that can’t be easily documented on a W-2 form.
With a bank statement loan, the lender reviews deposits into your checking and savings accounts to assess your income rather than requiring you to provide pay stubs or tax returns. As long as you can show regular deposits, a lender may approve you. This provides more flexibility for borrowers who may not meet the stringent requirements of a conventional loan.
Who Are Bank Statement Loans For?
Bank statement loans are best suited for borrowers with irregular income streams who still have sufficient earnings to afford mortgage payments. Some examples of ideal candidates include:
- Self-employed individuals
- Business owners
- Real estate investors
- Gig economy workers
- Freelancers
- Contractors
- Seasonal workers
Borrowers who claim significant deductions on their taxes that reduce their adjusted gross income may also benefit. A bank statement loan allows you to qualify based on your gross earnings rather than your post-deduction taxable income.
Bank Statement Loan Requirements
While bank statement loans offer more flexibility, you still need to meet certain requirements to qualify:
- Credit score: At minimum 620, but scores of 700+ get better rates
- Down payment: Typically 10-20%
- Bank statements: 12-24 months of personal and business account statements
- Cash reserves: 2-12 months worth of mortgage payments in savings
- Debt-to-income ratio: Varies by lender but often below 50%
Lenders will review your bank account deposits to estimate your income over time. You’ll also need to provide documentation about your business such as licenses and organizational documents if applicable.
How Do Bank Statement Loans Work?
Here is an overview of the bank statement loan process from application to closing:
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Get pre-qualified: Discuss your situation with a lender to determine if you may qualify and get a pre-approval letter.
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Submit bank statements: Provide personal and business bank statements from the last 12-24 months so the lender can assess your income.
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Verify income: The lender calculates your qualifying income by analyzing deposit amounts and frequencies. They may deduct exempt deposits.
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Submit business docs: If self-employed, provide business licenses, organizational docs, tax IDs, and other paperwork to substantiate your business.
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Get appraised: The property will be appraised to determine its fair market value and make sure it’s adequate collateral.
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Undergo underwriting: The lender will verify your income, assets, employment, credit, and debt obligations to approve your loan.
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Close on mortgage: Once approved, you’ll finalize the legal paperwork, pay closing costs, and obtain the keys once the deal closes!
Pros and Cons of Bank Statement Loans
Bank statement loans provide flexible qualifying options, but also have some downsides to consider:
Pros
- Verify income without tax returns
- Qualify with 1099s and bank statements
- Ideal for self-employed and gig workers
- Lower barrier to homeownership
Cons
- Higher interest rates than conventional loans
- Larger down payments usually required
- Can have prepayment penalties
- Tougher to qualify for refinancing
Carefully weigh the advantages and disadvantages before deciding if a bank statement loan is your best option.
Alternatives to Bank Statement Loans
Bank statement loans aren’t the only solution for non-traditional borrowers. Some alternatives to consider include:
- FHA loans – More flexible credit and down payment requirements
- VA loans – 100% financing options for veterans
- USDA loans – Zero down payment loans for rural buyers
- Portfolio loans – Non-conforming loans held by local banks
- Alternative income loans – Use income sources like rental properties
- Manual underwriting – Case-by-case income assessment
Explore all your choices before pursuing a bank statement loan, which should be viewed as more of a last resort option if you don’t qualify through conventional means.
Finding the Right Bank Statement Lender
Not all mortgage lenders offer bank statement loan programs. Many borrowers work with specialized mortgage brokers to find bank statement loan options. Here are some tips for finding the right lender:
- Search online for “bank statement loans” or “non-QM loans”
- Ask brokers if they have bank statement loan connections
- Look for wholesale lenders that offer non-QM loans
- Compare interest rates and fees from multiple lenders
- Verify licenses and read online reviews
- Ask about their experience with these unique loans
Take the time to vet a few lenders to ensure you find the most reputable bank statement loan for your needs.
Is a Bank Statement Loan Right for You?
While bank statement loans provide a less restrictive path to homeownership, they aren’t the best solution for every buyer. Carefully consider your options and understand the risks before pursuing this type of non-conventional financing. Conventional loans typically offer lower rates and costs if you can qualify. But for certain non-traditional borrowers, a bank statement loan may be the gateway to finally purchasing a home.
Bank Statement Loan Requirements
- Must provide 12 months of consecutive bank statements from the same account
- 10% down payment required with mortgage insurance
- Up to 90% max LTV
- 680 minimum credit score
- 45% maximum debt-to-income ratio
- $1,250,000 maximum loan amount, $175,000 minimum*
- Must escrow for taxes and insurance
- Minimum of 2 years self-employment or 1099 contract work with exception can be made to 1 year self employed if same line of work prior
Bank Statement Loan FAQs
Like a traditional mortgage loan, you should maintain a good credit score (680 and up) to be approved for a bank statement loan.
With bank statement loans, the lender uses bank statements to analyze a borrowers income instead of using standard documentation. Lenders that offer bank statement loan programs will look at a borrowers bank over a 12 to 24 month time period to determine the borrowers net income, which is the amount of money earned after the borrower has paid taxes and business-related expenses. Here’s a blog that helps explain this more.
NASB requires at least two years of self-employment, 12 months of consecutive bank statements from the same account, up to 90% max LTV, and the borrower must have a 45% maximum debt-to-income ratio. The maximum loan amount is $1,250,000.
The qualifications for a bank statement loan may vary by lender. But in general, a borrower is required to have at least two years of self-employed income and business experience. Once a lender has determined income, they will decide the maximum loan amount allowed. This is based on the borrower’s debt-to-income ratio, a percentage of the monthly income that goes towards paying any debt they may have, including a mortgage.
A minimum loan amount of $175,000 is required to apply. Exceptions include mortgage products for properties located within the Greater Kansas City metro and surrounding areas. Contact a NASB Loan Officer for details on the excluded areas and/or zip codes.
Bank Statement Loans: What They Are and How They Work #Podcast
FAQ
How is a bank statement loan calculated?
How much down payment for a bank statement loan?
How does a 12 month bank statement loan work?
How much bank statements do you need for a loan?
How does a bank statement loan work?
When you apply for a bank statement loan, the lender will analyze recent bank statements to verify your income trends and household expenses to see if you qualify for a mortgage.
Can a bank statement be used for a loan?
Lenders can use previous bank statements to vet potential borrowers if W-2s and pay stubs aren’t available or don’t accurately portray their income. Interest rates may be higher with bank statement loans, so borrowers should try to qualify with tax returns first, if possible.
What is a bank statement mortgage?
Bank statement mortgages are an alternative loan option for those with non-traditional income. This can include freelancers, contractors, small business owners, and other similar professionals. These loans help non-traditional borrowers qualify for mortgages thanks to their:
Do bank statement loans count as income?
Availability and eligibility of bank statement mortgages will vary by provider, but here are some common examples. Personal bank statement loans: Generally requires 12 to 24 months of statements from personal accounts. Up to 100% of deposits can be counted toward income Business bank statement loans: Often up to 50% of deposits counted as income.