Bank Statement Loan Mortgage for Self-Employed Homebuyers Comprehensive Guide: 2024 Update

Bank statement loans allow self-employed borrowers to use their bank deposits as proof of income, bypassing traditional income verification methods like W-2s or tax returns. This makes mortgages simpler and more attainable for non-traditional workers.

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Key takeaways

• Use bank statements instead of tax returns and W2s
• Ideal for freelancers, entrepreneurs, business owners, gig workers, and the self-employed
• Faster pre-approval and closing compared to traditional loans
• Generally receive higher loan approvals compared to conventional loans

What is a bank statement loan mortgage?

A bank statement loan is a non-qualified mortgage option for buyers who might not have a traditional paycheck but still earn a steady income.

This type of mortgage lets you use your bank statements to show how much money you make instead of W-2 forms or tax returns.

It's particularly helpful for freelancers, self-employed individuals, and gig workers whose income might appear lower on tax returns due to business deductions.

With a bank statement loan, you get to demonstrate your true financial health directly through the cash flow in your accounts, making it easier to qualify for a home loan.

This approach broadens mortgage access, ensuring more people can buy homes without the usual paperwork hurdles.

Exploring a bank statement loan mortgage could be a smart move if you're considering a non-traditional path to homeownership.

How does a bank statement loan work?

Bank statement loans use 30-100% of the average deposits (the “expense ratio”), depending on your business type.

View the table below for an example:

The estimated max purchase price is based on 43% DTI, 20% down, $250 monthly debts, 1% property tax, $600 annual insurance, an 8% rate for bank statement loans, and a 6.5% rate for conventional loans Example purposes only.

Are there different types of bank statement loans?

Yes, there are several types of bank statement loans, each designed to cater to different financial situations and needs of self-employed individuals.

Each type offers varying loan amounts and terms designed to accommodate the unique income patterns and needs of the self-employed.

• Personal bank statement loans: Ideal for sole proprietors and freelancers, these loans use personal bank account statements to assess income and cash flow over 12 to 24 months.
• Business bank statement loans: Suitable for business owners who maintain separate business accounts. Lenders evaluate the business's cash flow to determine loan eligibility and amounts.
• One-month bank statement loans: A newer option for those who can demonstrate substantial monthly income through a single month's bank statement, useful for quickly proving recent income increases.

How to qualify for a bank statement mortgage loan

Qualifying for a bank statement loan offers self-employed and non-traditional workers an alternative means to homeownership.

This loan focuses on liquidity and cash flow instead of traditional income proofs like W-2s or tax returns.

General bank statement mortgage loan requirements

• Lenders require 12 to 24 months of bank statements to verify income stability and cash flow.
• A minimum credit score (often around 620)
• Expect to need a larger down payment, usually at least 10%
• Lenders will assess your DTI to ensure you can manage monthly payments. A lower DTI can improve your chances of approval.
• You may need to demonstrate that you own a legitimate business, often through a business license or similar documentation.
• Significant financial reserves can also help, showing lenders you can cover mortgage payments during leaner income periods.

What kinds of non-traditional workers can get a bank statement loan?

Countless types of business owners can use this loan, but here are a few of which bank statement loans are the most popular:

The benefits of statement loans for self-employed homebuyers

Bank statement loans offer significant advantages for self-employed individuals, who often face hurdles with traditional mortgage qualifications due to fluctuating incomes or complex tax deductions.

Traditional income verification methods can unfairly disqualify self-employed professionals. Bank statement loans use direct cash flow analysis, opening home loan opportunities.

Instead of tax returns, self-employed applicants can use 12-24 months of bank statements to demonstrate income stability.

Self-employed home loan scenario

Alex is a freelance graphic designer whose monthly income varies from $3,000 to $7,500. Traditional lenders are wary because their tax returns show large deductions.

With a bank statement loan, Alex can qualify based on his average monthly deposits, providing a steady income of approximately $5,000 a month, which enables him to secure a home loan comfortably.

The pros and cons of bank statement loans

Bank statement loans, like any other financial product, come with advantages and drawbacks.

Here’s what you’ll need to know about making an informed decision about whether or not a bank statement loan is right for you and your situation.

Pros of bank statement loans

• Close faster than traditional loans
• No tax returns are required
• Loans are verified through 12-24 months of personal or business bank statements to prove income
• You might qualify for a higher loan amount and can buy a bigger home

Cons of bank statement loans

• Slightly higher mortgage rates (about 1-3% higher)
• Require a larger down payment
• Requires higher credit scores
• Sizeable and substantial cash reserves are required (around 3-6 months worth)

Bank statement loan guidelines and requirements for self-employed

By understanding these guidelines, self-employed individuals can better prepare for the mortgage application process, ensuring they meet the criteria to take full advantage of bank statement loans. These loans accommodate unique financial situations.

Here’s a more in-depth checklist of the bank statement loan requirements:

• 10-25% down of the home's purchase price: The exact amount can vary depending on your credit score; the higher your score, the lower the down payment required. Interestingly, unlike many traditional loans, bank statement loans often do not require mortgage insurance, even if the down payment is less than 20%.
• Find a lender experienced in non-QM loans: These loans fall under the non-qualified mortgage (non-QM) category, which allows for more flexible qualification criteria than standard products.
• A credit score 620-660+ is usually necessary: Higher scores are needed for the best rates and lower down payments. Lenders also examine your credit history for major events; no collections and a clean slate for at least two years post-foreclosure or Chapter 13 bankruptcy are typically required.
• A DTI no higher than 40-50% when all debts are considered: allows for significant flexibility compared to traditional loans.
• Ensure property is eligible: Bank statement loans allow funding for various kinds properties for primary residences, second homes, or investment properties, including single-family homes, condos, and townhomes.
• Proof of at least two years of self-employment: Income is verified through bank statements rather than traditional income documents.
• At least six months of financial reserves after covering the down payment and closing costs, with requirements extending up to 12+ months for larger loan amounts.
• Complete home appraisal: Two appraisals might be mandated for high-value loans, particularly those over $1 million, to ensure property value accuracy.

Understand your bank statement mortgage loan terms

• Available loan types include 30-year fixed, adjustable-rate mortgages (ARMs), and even 40-year loans with a 10-year interest-only period.
• Prepayment penalties may apply, so it's important to discuss this with your lender beforehand.
• Some lenders allow the use of gift funds towards the down payment and closing costs, provided the funds have been in your account for 30-60 days before the application.

What’s the bank statement mortgage loan process?

Securing a mortgage with just bank statements can sometimes be the only option for non-traditional earners who lack standard income verification documents to buy a home.

Here’s how you can obtain a bank statement mortgage loan:

• Complete an application with the lender
• Submit 12 to 24 months of bank statements
• Within 2-3 days, the lender reviews your bank statements to determine your average monthly income.
• Once your income is verified, you'll receive a pre-approval
• Start house hunting with your pre-approval budget in mind
• Get an accepted offer on a home
• Work with your lender to receive final approval and sign the final paperwork
• Close on your home purchase

Comparing bank statement mortgage rates: costs and benefits

Bank statement mortgage rates are generally 1-3% higher than conventional Fannie May mortgages, reflecting the higher risk perceived by lenders because of less consistent income sources.

Though you pay slightly more interest, this loan may be the only option for entrepreneurs and freelancers who cannot secure conventional loans.

For most non-traditional workers, getting a bank statement loan means the difference between buying a home and staying a renter.

11 bank statement loan alternatives

If you’re finding that bank statement loan programs don’t meet your needs, several other options based on your unique financial situation can help.

• Stated income: Most stated income loans use another method to verify the ability to repay, such as bank statements or property cash flow. Ability to Repay rules still apply to Non-QM loans, so you’re unlikely to find a true stated income loan.
• DSCR loans: Ideal for real estate investors, Debt Service Coverage Ratio (DSCR) loans focus on the cash flow generated by the property rather than the borrower's income.
• FHA loans: Known for their lenient qualification criteria, FHA loans are popular among first-time homebuyers. They require a lower down payment and are more forgiving of lower credit scores.
• VA loans: These loans are available to service members, veterans, and their families. They offer significant benefits, such as no down payment or private mortgage insurance requirements.
• Asset depletion loans: These loans are suitable for individuals with substantial assets but no regular income. Lenders calculate income by dividing total liquid assets by a set number of months (e.g., $1 million in assets divided by 120 months provides an assumed income of $8,333 per month).
• 1099 loans: Tailored for contractors and freelancers who can provide one or two years of 1099 forms showing consistent income levels.
• P&L loans: These require a profit and loss statement verified by a CPA, and they are useful for business owners with complex financials.
• Hard money loans: Hard money loans are short-term financing options based on property value rather than creditworthiness, providing quick funds for property stabilization and later refinancing.
• Interest-only loans: You pay only the interest on the loan initially, which can keep payments low for the first few years. However, this option does not build equity during the interest-only period.
• Portfolio loans: These loans are offered by lenders who keep the loans in their own investment portfolios. They may have more flexible qualification standards and are often not publicly advertised. They are best suited for high-value clients with existing lender relationships.
• Conventional loans: Widely available, these loans often offer better interest rates and terms, ideal for borrowers with stable, documentable incomes. They typically require proof of income through pay stubs or W-2 forms.

Do bank statement loans require private mortgage insurance (PMI)?

Private mortgage insurance (PMI) is typically not required for bank statement loans, even if the down payment is under 20%—making this one of the most attractive features for self-employed workers.

While PMI is generally waived, bank statement loans require larger down payments (around 10-25%) to offset the lender’s risk.

This PMI exception can lead to substantial savings over the life of the loan, enhancing the financial viability for freelance and non-traditional workers.

How much can you get from a bank statement loan?

Your loan amount is primarily determined by your income, as shown in your bank statements, credit score, and property value.

• Max: Typically, $1-$5 million, depending on the lender.
• Min: Typically $100,000-$250,000.

Bank statement loan borrowing scenario

Consider a self-employed realtor whose bank statements show an average monthly income of $8,000.

If this realtor has a solid credit score that qualifies them for a loan-to-value ratio (LTV) of 85%, and they're looking at a property valued at $400,000, they could potentially secure a loan amount of up to $340,000.

1099-NEC for independent contractors and self-employed

The 1099-NEC form documents non-employee compensation of independent contractors and self-employed individuals.

Some lenders offer flexibility to combine one year’s 1099 income with the current year’s bank statement deposits for mortgage qualification.

This is useful if your bank statements from the previous year include numerous non-sufficient funds (NSFs). However, having more than 5-10 will make you ineligible for loan approval.

If the 1099 form doesn’t cover the current year entirely, lenders may require a year-to-date pay stub or bank statements from the current year with the previous 1099 to adequately assess income.

Documenting abnormally large business deposits

Perhaps your business made a rather large deal and got a huge deposit, which is an outlier compared to your usual business income. This may raise red flags, but don’t worry; ensure it’s documented properly.

When reviewing your bank statements, lenders will pay close attention to unusually large deposits that deviate from regular income patterns.

This scrutiny ensures these deposits are not loans disguised as income, which could affect your loan eligibility.

How to prepare for your bank statement loan application

Are you ready to apply for your bank loan application? Here’s a checklist you can use to smooth out the process and boost your chances of approval:

• Compile your bank statements from the past 24 months. These are the core requirements of your application.
• Ensure your credit score is free from errors and work on paying down existing debts. A higher credit score can significantly improve loan terms.
• If your business has had large deposits, prepare documentation explaining each instance. Lenders value clarity on where these funds originated.
• Prepare documentation for large deposits to explain how you got them
• Review your financial strategy with an advisor.

Strategies for successful bank statement loan repayment

For self-employed people, managing a mortgage with fluctuating income requires strategic planning and adaptability.

Here’s how to navigate bank statement loan repayments effectively while being mindful of potential prepayment penalties:

• Create a safety net of at least 3-6 months of payments, safeguarding against low-income months
• Time up your mortgage payments with your income peaks. For example, if you receive significant payments from clients quarterly, schedule your larger mortgage payments accordingly to avoid cash flow issues
• Check if your loan has prepayment penalties ahead of time. Some bank statement loan programs may restrict early repayment to manage lending risks.
• Keep your lender informed about your financial status. If you expect slow months ahead, discuss this with them early to find flexible payment solutions to prevent loan default.

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Bank statement loans for self-employed workers made easier

In the US, 10 million self-employed people can now access a simpler way to finance or refinance their properties through bank statement loans without tax returns.

Achieve your homeownership dreams with fewer obstacles and less bureaucracy.