What Is a Bank Statement Loan? | Mortgages and Advice

If you’re trying to take out a mortgage loan as a self-employed borrower, you may find the qualification process a bit more challenging than if you had a salaried or hourly position that comes with a W-2. Rather than providing a W-2 and tax return, some lenders offer bank statement loans, which are specifically based on your income history.

Here’s a look at what bank statement loans are, how they work and whether this type of mortgage is right for you.

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. These bank statements are accepted in lieu of typical income documents – like pay stubs or W-2s – since self-employed individuals aren’t issued these forms and don’t typically have a predictable or contracted income the way that salaried individuals do.

Instead, a bank statement loan can be issued if these documents demonstrate that the borrower earns sufficient income to qualify for the loan in question. Combined with other factors, like credit score and down payment amount, previous months’ bank statements can be the key to qualifying for a home loan if you’re self-employed.

Bank statement loans can be a great option for anyone who earns income in a non-traditional way. This includes:

These individuals may work for multiple clients or have various income sources, and their income could also ebb and flow throughout the year. By opting for a bank statement loan, lenders can better determine whether your business is stable and if you can afford a home loan.
“The only people who can qualify for a bank statement loan are those who are self-employed, including 100% commission or 1099 employees,” says Christy Bunce, president at mortgage lender New American Funding. “If you are self-employed and can qualify off of your tax return, you should do that because the interest rate will be lower. But if that’s not an option for you, then a bank statement loan is a great option as well.”

The primary requirement for a bank statement loan is, as you might expect, the ability to provide the lender with previous bank statements that demonstrate your income. Some lenders may only want to see the last 12 months of consecutive bank statements, while others might request 24.

In addition to submitting these statements in full, you’ll also need to meet the lender’s other home mortgage loan requirements. This means meeting a minimum credit score requirement, having a low enough debt-to-income ratio (DTI), providing a sufficient down payment and even choosing a home within a certain loan amount. The maximum loan will be determined not only by the lender’s own limits but also factors such as your income and current household expenses.

As a condition of loan approval, the lender may also require you to escrow certain home expenses, such as property taxes and homeowners insurance premiums.

Applying for a bank statement loan is often very similar to applying for a traditional home mortgage loan, except only a limited number of lenders offer these types of loans.

Depending on the lender, you may be able to begin the application process online. You’ll usually need to provide information such as your:

Since it’s a bank statement loan, expect to upload or otherwise submit your last 12 to 24 months of personal or business bank statements – depending on the lender’s requirements. These will need to be consecutive and complete statements, so you can’t skip certain months, leave off individual pages or redact any information.
The lender will look through these statements to analyze deposit frequency, patterns and total income. They will usually contact the bank to verify your deposits as well.

The lender may still want to see your personal tax filings from the last two years, even with the provided bank statements. Expect that you may also need to provide additional documentation, depending on your situation, such as existing loan balances, credit card statements, profit & loss statements for your business, balance sheets and more.

Not sure if this type of loan is right for you and your situation? Here are some of the pros and cons of bank statement loans:

Overall, a bank statement loan should really only be considered if you don’t qualify for a traditional home mortgage loan. Because these loans are non-QM, you may find yourself facing limited repayment terms or down payment options, higher interest rates or lacking important protections.

Instead, some alternatives to consider include:

A bank statement loan may be a great choice for a self-employed borrower whose income isn’t reported on a W-2 and can’t provide a lender with pay stubs. Using previous bank statements, lenders can verify self-employment income from freelancers, small business owners, independent contractors and gig workers. These statements can be used to demonstrate that an individual can afford a home loan, even if their income is non-traditional or inconsistent.

However, you should consider all of your options first to ensure you choose the best loan with the most protections. “Bank statement loans should be your last choice as a home buyer because rates, fees and down payment requirements are higher,” says Dan Green, CEO of Cincinnati-based mortgage company, Homebuyer.com. “Always try for a conventional or other government-backed loan approval first. Let bank statement loans be a viable fallback option.”