Bank Statement Loan: What It Is And Who It’s For

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.

Bank statement loans typically cater to self-employed borrowers or those with inconsistent income. These types of loans, which are not that common, have eligibility guidelines that differ from traditional mortgages.

A bank statement loan can be helpful if your income is inconsistent, your employer doesn’t issue traditional paychecks or if 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.

For example, your tax return may show you made $100,000, when in fact you made $200,000 but used tax deductions to reduce your taxable income. In that situation, bank statements would be a way to show your income.

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%, 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 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 that you will be required 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% down payment
• Have adequate cash reserves
• Have a credit score of at least 620
• Have a DTI ratio of 45% or lower (some lenders allow a higher percentage)
• Provide business licenses, organization documents and other related paperwork

Pros

• Flexibility: If you have non-traditional income streams, you can use your bank statements in lieu of traditional income documents to qualify for a loan.
• Accessibility: You don’t need perfect credit to get a bank statement mortgage, as some lenders accept borrowers with credit scores as low as 620.
• May have higher loan limits: With a bank statement loan, you might be able to take out a bigger loan than conventional loan limits.

Cons

• Higher borrowing costs: Expect higher interest rates due to the risky nature of these loan products.
• Larger down payment: Lenders generally require a down payment of at least 10%, which is higher than those required for conventional and government-backed loan products.
• Prepayment penalties: Some bank statement loans come with prepayment penalties that could make it costly to refinance or pay your balance off early.

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, make sure that 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. Ask what the rules are regarding bank statements for mortgage preapproval.
• 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. Bank statement loan rates today can vary, so it’s smart to shop around.
• 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.
• 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.

Should you get a bank statement mortgage?

Good candidates for a bank statement mortgage include:

• Self-employed individuals: If you work for yourself, it can be difficult to provide proof of steady earnings or a consistent job history, which is where a bank statement loan comes in handy.
• Freelancers: Independent contractors often cannot demonstrate the regular job history and evidence of income that employees who work for a company can, which makes a bank statement loan a worthy option.
• Small-business owners: Again, with a bank statement loan, you don’t have to provide pay stubs and W-2s from recent years of employment, which can be ideal for owners of small businesses — some of whom might not pay themselves or generate earnings consistently.
• Entrepreneurs: If you’re launching a startup or operating a riskier-than-normal business, your income and tax returns may frequently be adjusted for deductions and business expenses, making it challenging to qualify for a traditional mortgage but perhaps easier to qualify for a bank statement mortgage.
• Gig workers: If you are someone who does temporary, flexible jobs that can vary in pay, length and consistency, a bank statement loan could perfectly fit the bill.
• Full-time real estate investors: For all the reasons listed above, you’ll likely benefit from this form of financing if you are a landlord or other full-time real estate investor.

A bank statement mortgage might be right for you if your tax returns don’t adequately reflect your income. This may be the case, for instance, if you’re self-employed and heavily use tax write-offs to minimize your adjusted gross income (AGI) or you’re a small-business owner who acquires new businesses, but your personal income taxes are significantly reduced due to large one-time payments.

“Most people try to minimize their income tax bill and write off a lot of expenses against their business income,” says Mason Whitehead, Dallas-based branch manager for Churchill Mortgage. “Unfortunately, those same people then want to buy a home and, in many cases, don’t show sufficient taxable income to qualify.”

Using a bank statement loan in such cases can allow business owners facing this challenge to still qualify for a mortgage.

“Bank statement loans frequently have slightly higher rates than a traditional mortgage, but in some cases with larger down payments, they are not that much higher,” Whitehead says. “Ultimately, it’s the difference between getting the home and not getting the home that you want.”

Still, 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 consider all options. Ultimately, you want to try a conventional loan first.