A bank statement loan is a type of mortgage that allows borrowers to qualify using recent bank statements rather than tax returns. This loan is ideal for self-employed people or those with non-traditional income sources. If you don’t have steady paychecks or have income that varies month-to-month, a bank statement loan could help you buy or refinance a home.
How Bank Statement Loans Work
With a traditional mortgage you need documents like W-2s pay stubs, and tax returns to verify your income. But some borrowers can’t easily provide those, especially if they are self-employed, an independent contractor, investor, or have other irregular income sources.
A bank statement loan uses your bank account deposits to assess your financial health instead of pay stubs or tax returns. The lender reviews deposits going back 12-24 months to calculate your average monthly income As long as there is a consistent flow of deposits, it can qualify you for a mortgage.
Some of the common requirements for a bank statement loan include:
- 12-24 months of personal and business bank statements
- Two years of self-employment history
- Valid business license
- Minimum credit score requirements (often 640 or higher)
- Total debt-to-income ratio below 50%
- Enough cash reserves to cover 6-12 months of mortgage payments
- Additional liquid assets like retirement accounts
The lender reviews recent deposits to determine your average monthly income. They want to see steady deposits over time, not just a few large deposits. Providing supplementary documents like a business license and tax ID can help validate your self-employed status.
Pros and Cons of Bank Statement Loans
Pros
- More accessible for self-employed and gig workers
- Uses bank statements rather than tax returns
- Can qualify for higher loan amounts
- Available even with low credit scores
- Typically no prepayment penalties
Cons
- Higher interest rates than conventional mortgages
- Larger down payments required
- Offered by limited lenders
- More stringent credit score requirements
The main draw of a bank statement loan is the ability to qualify without traditional income verification. For self-employed borrowers who maximize write-offs to lower their taxable income, it can be easier to qualify this way. Rates may be higher, but you gain more flexibility in the underwriting process.
Who Should Consider a Bank Statement Loan?
Bank statement loans work best for certain borrower profiles:
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Self-employed – If you are an independent contractor, consultant, freelancer, or own a small business, this loan uses bank statements to verify income.
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** Seasonal workers** – If you earn income seasonally and don’t have year-round paystubs, bank statements can help reflect your full earnings potential.
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Tip earners – For workers like waiters who earn tips that don’t show up on paystubs, bank statement deposits provide a clearer income picture.
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Gig workers – Rideshare drivers, delivery workers, and others in the gig economy can show deposit history rather than 1099s to qualify.
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Asset-based borrowers – If you earn money from investments or other assets, deposit activity can document this even if tax returns show low income.
The most common bank statement loan borrower has irregular income sources that don’t conform to W-2 employee norms. By using deposit activity rather than paystubs or tax returns, it can help these unconventional earners qualify for mortgages.
How to Apply for a Bank Statement Loan
Bank statement loans are considered “non-qualified mortgages” under criteria set by Fannie Mae and Freddie Mac. This means not all lenders offer them. Many smaller banks, credit unions, and non-bank mortgage lenders are your best options.
Here are some tips for getting a bank statement mortgage:
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Work with a mortgage broker – Brokers have relationships with multiple lenders and can help find ones offering bank statement loans.
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Ask locally – Small community banks and credit unions are more likely to do portfolio lending outside of conventional programs.
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Compare multiple quotes – Shop around among lenders to get the best rates and terms. Each lender will have different requirements.
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Prepare all documentation – Have personal and business bank statements ready to support your income claims.
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Watch out for extra fees – Some lenders may charge higher origination fees on non-QM loans.
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Explain your situation – Clearly explain your income sources if they don’t neatly fit within checkboxes.
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Get pre-qualified – Going through pre-qualification can help identify any issues upfront.
Taking the time to shop around and get pre-qualified is important to find the right bank statement loan program.
Alternatives to Bank Statement Loans
If you don’t qualify for a bank statement loan, here are some other options to consider:
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FHA loans – Require only 3.5% down and are more flexible on credit scores and income types.
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VA loans – Offer 100% financing and underwriting leeway for veterans and military members.
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USDA loans – 100% financing for low-income borrowers in rural areas. Self-employed income allowed.
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Stated income loans – Allow you to state your income without documentation. However, these are rare currently.
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Manual underwriting – Involves a hands-on review of your application rather than automated underwriting.
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Co-signer – Adding a co-signer with better credit or income may help you qualify.
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Improve credit – Building your credit score and lowering debts can expand your mortgage options.
For certain borrowers, these alternative mortgages may provide better terms or be easier to obtain than a bank statement loan.
FAQ about Bank Statement Loans
Can I get a bank statement loan for an investment property?
Yes, bank statement loans can be used to purchase or refinance investment properties in addition to primary residences. The lender will review property cash flow as part of qualifying.
What credit score do I need?
Each lender will have their own minimum credit score, but you’ll likely need at least a 640 FICO for most bank statement loan programs. The higher your score, the better the loan terms will be.
Do I have to be completely self-employed?
No, you don’t need to be 100% self-employed. However, your self-employed income should make up the majority of earnings. Bank statements help document this income stream.
Can I use a bank statement loan to consolidate debt?
Yes, a cash-out refinance using a bank statement loan can be a way to tap equity to consolidate high-interest debts. The lender will review your monthly debts as part of approval.
Do bank statement loans have higher rates?
Yes, bank statement loan rates are usually 0.5 to 1 percentage point higher than conforming mortgages, due to the increased risk and non-QM status.
The Bottom Line
A bank statement loan can provide mortgage financing for borrowers who don’t have a traditional income history to document. By using your bank account deposits rather than paystubs or tax returns, it offers more flexibility. However, you’ll also pay higher rates and likely need a larger down payment.
For self-employed borrowers or those with irregular incomes, a bank statement loan may be one of the few ways to get approved. But make sure to compare multiple lenders to get the best deal. With the right planning and preparation, it can be your ticket into homeownership.
Who can benefit from a bank statement mortgage?
Bank statement mortgages benefit self-employed individuals, those with non-traditional income, seasonal workers, individuals with inconsistent cash flow, and borrowers with lower credit scores. These mortgages allow them to qualify based on their bank statements, providing a flexible alternative to traditional mortgages.
How do bank statement loans work?
In a bank statement mortgage, the borrower’s income verification does not rely on employment verification forms. Instead, the lender assesses personal, or business bank statements provided by the borrower.