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What Is a Bank Statement Loan? | Mortgages and Advice

Key Takeaways:

  • Bank statement loans are a type of non-qualified (non-QM) mortgage, which may make it easier for self-employed borrowers to buy a home.
  • 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. 

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.

How Do Bank Statement Loans 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. 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.

Who Can Benefit from Bank Statement Loans?

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

  • Small business owners.
  • Independent contractors.
  • Freelancers.
  • Gig workers.
  • Retirees.

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.”

Requirements for a Bank Statement Loan

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.

Steps to Apply for a Bank Statement Loan

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:

  • Name.
  • Address.
  • Contact information, such as your phone number and email address.
  • Social Security number.
  • Annual income.
  • Current household expenses.

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.

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Pros and Cons of Bank Statement Loans

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:

Pros

  • Offers a workaround for individuals without a W-2 income structure.

  • May be available for primary homes as well as secondary, vacation and rental properties.

  • Can be used to receive home equity loans.

  • Typically has similar eligibility requirements to traditional mortgage loans, like credit score, DTI and loan-to-value ratio.

Cons

  • Loan options – including repayment terms, loan limits and down payment amounts – may be more limited than other home loans.

  • Only offered by select lenders.

  • As non-QM loans, these mortgages may have higher interest rates, lack certain consumer protections and even take longer to close than conventional home mortgage loans.

Bank Statement Loan Alternatives

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:

  • Conventional home mortgage loans. The most common type of home loan is the conventional mortgage, which usually offers the most flexible loan terms and competitive interest rates. 
  • FHA loans. Available to qualified first-time homebuyers, these loans have lower credit score and down payment requirements. 
  • VA loans. These loans are available to eligible service members, veterans, spouses and survivors. These loans may have lower credit score, income and down payment requirements.
  • USDA loans. Offered to low- and moderate-income households, these loans are offered for homes in eligible rural areas with up to 100% financing.
  • Home equity loans. If you have an existing property you plan to keep, you may be able to pull from the equity in that home to use toward the down payment on a new home.
  • Owner financing. An owner-financed purchase allows you to circumvent typical lender requirements and buy a home directly from a homeowner with a personalized repayment arrangement. However, these aren’t always available and can be riskier than mortgage loans handled by lenders.

Is a Bank Statement Loan Right for You?

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.”

Sarah Goldberg
Sarah Goldberg

Sarah is a seasoned financial market expert with a decade of experience. She's known for her analytical skills, attention to detail, and ability to communicate complex financial concepts. She holds a Bachelor's degree in Finance, is a licensed financial advisor, and enjoys reading and traveling in her free time.

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