Bank statement loan: Who should get one?
A mortgage option for those who are self-employed
With the rise of the gig economy, more people are opting for self-employment and starting businesses instead of working a traditional nine-to-five. And while this is a great way to build a flexible lifestyle, it can create complications when buying a home.
Traditional home loans rely on documents like your Form W-2 and pay stubs to determine how much financing you qualify for. As a business owner, you may not be able to provide those documents. If you earn income from your own business or another atypical source, you might want to consider a bank statement loan.
Lenders may approve you for a bank statement mortgage if you don’t have a regular employer that issues W-2s. They use your bank statements to determine your income and the mortgage amount you qualify for.
Here’s how bank statement loans work, how to find a lender that offers them and the pros and cons of using one.
Key insights
- Bank statement loans are for self-employed individuals and other borrowers with nontraditional income sources.
- Bank statement loans use your bank statements to prove your income.
- Bank statement loans are riskier for lenders and typically come with higher fees and interest rates than traditional mortgages.
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.
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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.
Where to get a bank statement loan
Many 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.
Here are the pros and cons of bank statement loans:
Pros
- You can qualify based on cash flow.
- It allows you to become a homeowner even if you’re self-employed.
Cons
- Bank statement loans have higher interest rates and fees than traditional mortgages.
- A bank statement loan may require a large down payment.
- Not all lenders offer bank statement loans.
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.
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FAQ
Is it hard to get a bank statement loan?
Bank statement loans can be hard to find, as many lenders avoid them due to their higher risks and longer underwriting processes. But it shouldn't be too hard to qualify if you have adequate cash flow from your business or other nontraditional income sources and a decent credit score. Just make sure you have access to all the documentation needed when applying.
What credit score do you need for a bank statement loan?
The credit score needed for a bank statement loan will vary by lender. Some lenders may qualify you for a loan with a low credit score if you have significant assets and income, while others require a higher minimum score to apply. You’ll need to check with your mortgage broker or lender for the exact credit score minimums required for a bank statement loan.
Are bank statement loans more expensive?
In general, bank statement loans are more expensive than conforming loans. Because bank statement loans can’t be sold to Fannie Mae or Freddie Mac, they typically come with higher loan fees and interest rates.
What is the down payment on a bank statement mortgage?
The down payment required on a bank statement mortgage will vary, but most lenders require a 10% to 20% down payment. Bank statement loans require bigger down payments because these loans are seen as higher risk than conforming mortgages.
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.
Article sources
- Federal Housing Finance Agency, " Conforming Loan Limit (CLL) Values ." Accessed June 19, 2023.
