Bank statement loan: Who should get one?

What is a bank statement loan?

As the name implies, a bank statement loan is a mortgage loan that bases your income qualifications on deposits into your business and/or personal bank accounts. Instead of submitting a W-2, personal tax returns or pay stubs, you submit bank statements to prove your income is sufficient to qualify for a loan.

“This type of loan primarily focuses on cash flow, as evidenced by the borrower's bank statements, rather than traditional income verification methods. It's designed to show that while a borrower may not have regular W-2 income, they do have the cash flow necessary to handle mortgage payments,” said David A. Krebs, the principal broker at DAK Mortgage in Miami.

Bank statement loans are ideal for self-employed individuals or workers who don’t get regular paychecks. If you’re a consultant or work purely on commission, a bank statement loan may be a good way to prove your income and qualify for a larger mortgage.

Bank statement loans also look at total deposits, not just your taxable income. For example, if you’re a business owner with a high income and many one-time tax deductions, your taxable income may appear to be low at first glance. But a bank statement loan looks at your income and considers your business deductions when qualifying you for a mortgage.

How does a bank statement loan work?

A bank statement loan works a bit differently than a traditional mortgage. Instead of providing a copy of your personal tax return or recent pay stubs from your job, you will provide one to two years of bank statements showing your income.

You may need to provide personal and business bank statements for your lender to evaluate your income. And you may also need to provide further information about your business, including a profit and loss statement, business licenses, articles of organization and other pertinent documentation.

Bank statement loans may also require a larger down payment than many traditional loans, especially if your credit score is low. You might need up to 20% down (or more) depending on your credit profile, qualifying income and other financial information.

Jay Dacey, president of the Jay Dacey Mortgage Team in St. Paul, Minnesota, has a fairly straightforward process when assessing documentation for a bank statement loan. “We'll take an average amount of deposits over a 12- or 24-month period and then discount that based on the industry they are in and the margins associated with their type of business and use the balance as income,” says Dacey.

Here’s a step-by-step overview of the process from application to approval:

1. Initial inquiry and pre-qualification: Contact a lender or mortgage broker who offers bank statement loans. The lender will ask basic questions about your income, business and credit.
2. Gather required documents: You typically need to provide 12 to 24 months of personal or business bank statements, proof of business ownership (if applicable), a valid ID and possibly a profit and loss statement.
3. Submit your application: Complete the loan application and provide your documents to the lender.
4. Income calculation: The lender reviews your bank statements to calculate your average monthly deposits, which are used to estimate your qualifying income. Some lenders use a percentage of deposits to account for business expenses.
5. Credit and background check: The lender checks your credit score and financial history. Requirements are often more flexible than traditional loans.
6. Underwriting and approval: The underwriting team verifies your documents, evaluates your bank statement income and assesses your ability to repay the loan.
7. Loan offer and closing: If approved, you’ll receive a loan offer with terms and interest rates. After you accept, you proceed to closing, sign final documents and receive your funds.

» MORE: Are personal loans taxable and considered income?

Where to get a bank statement loan

Many mortgage lenders don’t issue bank statement loans due to the high risks of lending to borrowers without consistent income. Instead of calling around to lenders in your area, you might have better luck working with a mortgage broker. Brokers typically work with several lenders that offer a variety of loan types and can help you obtain a bank statement loan.

Mortgage brokers can also help you compare rates between several lenders, increasing the chances that you’ll find the best deal available to you. While brokers don’t typically add fees to a borrower’s mortgage costs, they charge the lender a finder’s fee.

It’s important to compare rates, though, as lenders might charge you higher rates or fees to make up for the finder’s fee they pay the broker.

Pros and cons of a bank statement loan

A bank statement loan is a great way to become a homeowner if you can’t qualify for a traditional mortgage. You can qualify for a bank statement loan based on deposits and cash flow instead of just recent pay stubs and tax forms. But a bank statement loan can be harder to find and usually comes with higher costs than a traditional mortgage.

Should you get a bank statement loan?

If you are a small business owner or work in a commission-based job, a bank statement loan may be your best option for purchasing a home. With inconsistent income or nontraditional income sources, many lenders won’t be able to approve you for a conventional mortgage.

A bank statement loan is a nonconforming loan that can’t be sold off to Fannie Mae or Freddie Mac, so its lender typically needs to hold it as part of its portfolio. This means the lender may charge higher interest rates and fees to offset the greater risk associated with these types of loans.

» MORE: Government home loans

Alternatives to bank statement loans

While bank statement loans are designed for self-employed borrowers without traditional income documentation, other mortgage options might be a better fit depending on your situation:

• Conventional loans: Require W-2s, pay stubs and tax returns. They usually offer lower interest rates for borrowers with steady income and good credit.
• FHA loans: Backed by the Federal Housing Administration, these loans have more flexible credit requirements and lower down payments. Good for first-time buyers or those with less-than-perfect credit who can provide standard documentation.
• Asset-based loans: Approval is based on your liquid assets instead of income. This can be helpful for retirees or people with significant savings but irregular income streams.

Each alternative has its own requirements and may offer better terms if you qualify.

Bottom line

Bank statement loans may be a good option for self-employed individuals and workers with inconsistent (but significant) income. Instead of looking at your pay stubs, bank statement loans allow lenders to review your income over the past few years to qualify you for a mortgage.

These loans come with higher fees and usually have higher interest rates than conforming loans, so you will pay more. But if you can’t qualify for a traditional mortgage, a bank statement loan may be your best option for buying a home.