Traditional mortgage lenders tend to underestimate self-employed borrowers. It’s not personal. It’s just a side effect of the way self-employment taxes work.
When they deduct their business expenses, self-employed tax filers lower their income on paper. And lower income on paper creates mortgage qualifying problems in real life.
The solution for many self-employed borrowers? Bank statement loans, which bypass tax forms in favor of bank statements — a huge advantage.
But, like any loan product, bank statement loans have cons, too. Let’s take a look:Start your bank statement loan approval.
What’s in this article?
Bank statement loan pros
First, let’s look at the pros, which include:
Potentially qualifying for a bigger loan
The amount you deposit into your bank accounts probably far exceeds the adjusted gross income on your tax returns. This is because self-employed taxpayers write off every expense that they can, as they should.
Bank statement loan lenders use an expense ratio — or a percentage of the bank deposits — which accounts for business expenses. This ratio is often 50%. But even after applying this ratio, you may be able to qualify for two to three times as much home compared to using tax returns.
Non-QM makes them more flexible
Bank statement loans are non-QM loans which means government regulators won’t be overseeing the lending process. The lender, by itself, calls the shots.
Having a conversation with the person who will be approving or rejecting your loan application can be an advantage for some borrowers.
Works the same for investment properties
Not all mortgages will finance investment properties, second homes, or vacation homes. But the best bank statement loans can finance any type of home purchase. In fact, they’re popular among residential real estate investors since they deduct so many business expenses.
12 months of statement is OK
Self-employed borrowers who qualify with their tax forms normally have to submit two years’ worth of tax returns. With a bank statement loan, you could qualify with one year of bank statements.
That way, if you earned more money last year than you did the year before, your lower earnings from two years ago won’t reduce your qualifying income.See if you’re eligible for a bank statement loan.
Can have higher loan limits
Regardless of your income, conventional home loans — and most government-backed loans like FHA — enforce maximum loan sizes.
Bank statement loans don’t follow the same rules. If you’re a high earner, you could qualify for a mortgage that exceeds your local loan limits.
Can work for employed borrowers, too
Some borrowers have both W2 and self-employment income. Many lenders allow you to combine both income types as long as you’ve been doing both for at least two years. Self-employment income must be at least 30% of total income for most lenders.
Bank statement loan cons
Documenting a higher, more accurate income with a bank statement loan is a pretty big upside. But it’s important to know the downsides of this loan product, too:
Bigger down payment required
Because they’re non-QM loans, lenders won’t be sharing the risk with the government. As a result, borrowers should expect to make a bigger down payment — usually 10% to 25% — compared to the 3% to 5% needed for conventional borrowing.
Higher interest rates
Mortgage rates for bank statement loans are usually about 2% above conventional financing rates.
The reason? Because the lender will keep your loan on its books instead of selling it to outside investors. Keeping the loan in-house is riskier, so lenders charge higher rates.
Learn more about bank statement loans.
Not subject to consumer protections
Conventional and government-backed home loans are regulated by the Consumer Financial Protection Bureau. The CFPB offers peace of mind when people buy financial products — kind of like how the Food and Drug Administration regulates what you buy at the grocery store.
Shopping for a bank statement loan is more like shopping for produce at a farmer’s market. While lenders are usually above board, it’s up to you to know what you’re buying.
They’re harder to find
Because they’re not off-the-shelf loan products, fewer lenders offer bank statement loans. You can ask your neighborhood credit union about this loan option. Some have them. But a lot of borrowers find better options online.
Lender sees your personal finances
Along with your deposits, bank statement loan officers will also see your withdrawals. Unless you’re hypersensitive about privacy, this shouldn’t be a deal breaker.
But withdrawals include fees for non-sufficient funds (NSF) — and those could be a deal breaker for your lender, especially if you have more than 5 to 10 of them in one year.Bank statement loans: Check your eligibility.
Bank statement loan alternatives
Bank statement loans may be your best option if you’re self-employed. But that’s not automatically true. One of these alternatives might work better.
Conventional loans will still work well for a lot of self-employed home buyers. Borrowers who don’t deduct a large percentage of their earnings — or borrowers who earn enough to absorb write-offs and still qualify for the loan size they need — can save money with traditional financing.
Real estate investors like to use Debt Service Coverage Ratio loans because these loans require no personal income documentation. Instead, they leverage cash flow from the new investment property as income. DSCR loans won’t finance primary residences, though.Submit your DSCR loan scenario.
Assets can stand in for income for home buyers. When you already have enough cash to make all the loan payments — and pay all your other living expenses — your income isn’t such a big deal.
Some small lenders may still offer stated income loans, but most of these lenders will still check bank statements or cash reserves. Stated income loans usually require at least 40% down, too.
Freelancers and gig workers may benefit from 1099 Loans which use 1099 forms to document income. Unlike completed tax forms, 1099s don’t show deductions — just earnings.
Business owners can show a profit and loss statement from their CPA to document cash flow and qualify for a mortgage.
Hard money loans
This form of short-term financing can work for house flippers and others who plan to sell or refinance quickly.
Bank statement loan FAQ
A bank statement loan can be good if you deduct business expenses from the income shown on your tax forms. But these loans cost more and require higher down payments. Weigh all the bank statement loan pros and cons carefully before applying.
Finding a lender that offers bank statement loans can be hard. Coming up with a larger-than-average down payment can be a challenge, too. After that, getting approved is simple if you can prove you earn enough to afford the loan.
Yes. Interest rates for bank statement loans are usually around 2% higher than conventional loans backed by Freddie Mac and Fannie Mae.
Start your bank statement loan
Bank statement loan pros and cons show that they aren’t for everybody. If you can qualify for a traditional mortgage, you should — especially if you’re buying a primary residence.
But if your taxable income is too low to get a mortgage because you deduct business expenses, a bank statement loan can help you get a mortgage that’s better sized to your income.Get a bank statement loan rate quote. Start here.