There are roughly 15 million self-employed individuals in the U.S., about 10% of the workforce.
It’s surprising, then, that lenders make it so difficult for them to buy a home.
Fortunately, those days are coming to an end.
Thanks to bank statement loans, self-employed home buyers can be approved based on bank deposits, not complicated tax returns with lots of write-offs.
If you’re worried that you won’t be approved due to your self-employment, it’s time to learn about bank statement loans.See if you qualify for a bank statement loan.
What’s in this article?
How does a bank statement loan work?
Instead of looking at adjusted gross income from tax returns, bank statement loans use the 12-24 months of bank statement deposits to determine income.
Removing tax returns from the approval process is a huge advantage. Self-employed business owners write off everything they legally can, which they should.
While this lowers their tax burden, it’s murder on a mortgage application. Lenders must use the after-expense income for qualification.
Instead, bank statement loans use 30-100% of the average deposits (the “expense ratio), depending on business type. This can be a game changer as seen in this table.
|Bank Deposits||Adj. Income on Tax Returns|
|Est. max home price*||$400,000||$285,000|
Estimated max purchase price based on 43% DTI, 20% down, $250 monthly debts, 1% property tax, $600 annual insurance, 8% rate for bank statement loan and 6.5% rate for conventional. Example purposes only.
Imagine qualifying for the home you really want instead of settling when you know you can afford more. This is where bank statement loans really shine.
Who can use a bank statement loan?
The types of business owners who can use this loan are countless, but here are a few with which bank statement loans are the most popular.
|Realtors||Small business owners||Real estate investors|
|Consultants||Gig workers||Independent contractors|
|Founders||Day traders||Early retirees|
|Personal trainers||Freelancers||Contract tech workers|
|Bookkeepers||Etsy shop owners||Bloggers & social media|
|Self-employed doctors||Dentists||Restaurant owners|
The list could go on forever, but you get the point. Anyone without a regular “job” could benefit.
What’s the bank statement loan process?
Getting approved for a bank statement loan can be faster than with a traditional mortgage.
- Complete an application with the lender
- Submit 24 months of bank statements
- As quickly as 2-3 days, the lender will determine your income
- This income will dictate your maximum home price
- Receive a pre-approval and start shopping for a home
- Get an accepted offer on a home
- Work with the lender to receive final approval and sign final paperwork
- Close on the home purchase
Sounds too good to be true. What’s the catch?
There’s no catch. Bank statement loans are non-QM loans, meaning they don’t have to adhere to conventional or government loan rules.
Rather, each bank statement loan lender makes its own rules and can be flexible about guidelines.
These loans aren’t dangerous “subprime” or “no-doc” loans as some might assume. Rather, they are a currently-available solution that lenders created to address a huge hole in the market.
Self-employed borrowers are the beneficiaries after years under-service from traditional lenders.
All this sounds great. What are the details?
As with any loan product, there are rules and guidelines that you must meet. Now that you know how bank statement loans work, the rest of this article will try to address guidelines.
Keep in mind that no article can cover every situation, and each person’s scenario is as unique as they are.
Still, we’ll try to help you determine whether this loan is right for you.
Ownership and business structure / which bank statements to use
You need to be self-employed to use this loan.
This means full ownership or at least 50% ownership in a partnership if using business bank accounts to qualify.
Sole proprietors may not have business bank accounts and that’s okay. Professionals like Realtors and independent contractors may deposit funds into their personal account. In this case, use personal bank statements to qualify.
Another group that may use personal accounts are partners of a business who receive regular distributions from the business. In this case, the lender may be able to use 100% of deposits into a personal account.
The best way to know your qualifying income, though, is to submit your scenario to a lender.
Should I use 12 or 24 months’ statements?
You’ll get a lower rate if you use 24 months of bank statements. However, if your income increased dramatically, you may consider using the most recent 12 months.
Speak with your loan officer. He or she is the mediator between you and underwriting. They not only catch things that may get your loan denied, but they will coach you on how to maximize your qualification income.
If at all possible, submit 24 months of statements and let your loan officer guide you to the best bank statement loan program.
About the expense ratio
The most common expense ratio is 50%. This means that the lender will use 50% of bank deposits for qualifying income to account for business expenses.
However, some lenders will give you an expense ratio of as little as 10-15%, meaning you can use 85-90% of business bank account deposits to qualify. A CPA letter stating that your expenses are low may be required.
Low-overhead businesses (80-100% of bank deposits)
Medium-overhead businesses (50% of bank deposits)
- Small business owners
- Boutique shop owners
- Real estate entrepreurs
High-overhead businesses (30% of bank deposits)
- Restaurant owners
- Construction business owners
- Business owners with many employees or locations
Keep in mind that the above are general guidelines but each lender may have different opinions on your business’s overhead.
How does the lender verify my business?
Most established businesses will have a license, website, business bank account, or other means of third-party verification.
An issue that independent contractors and freelancers may run into is that they don’t have a website or business license to prove self-employment. In this case, work with your lender to discover a verification method.
Length of self-employment may be determined by deposits into bank accounts.
Combining W2 and bank statement income
Some lenders allow you to use both W2 and bank deposits to qualify. However, you must have a significant income from the business, typically at least 30% of your W2 income. Both income streams may need to be continuous for the last 2 years.
If a spouse has W2 income, you can use their income on top of self-employed income as long as you don’t need tax returns to verify it.
The 1099 option
Some lenders allow you to combine one year’s 1099 income with the current year’s bank statement deposits.
You may need this option if you had too many NSFs in the prior year. More than 5-10 NSFs will kill the deal.
Because the 1099 won’t cover the current year, you would need a year-to-date pay stub or all of the current year’s bank statements in combination with the previous year’s 1099.
Abnormally large deposits
In the course of business, you may receive a huge deposit that doesn’t match regular income.
The lender will verify where this came from and ensure it’s not a loan. Because it’s not typical, you may only get credit for the amount that matches the 12 or 24 month average.
Learn more about alternative loan programs.
Bank statement loan mortgage rates
Bank statement loan interest rates are around 2% higher than Fannie Mae conventional rates for similar criteria according to a recent My Perfect Mortgage survey. This is reasonable considering the lender does not ask for tax returns, pay stubs, W2s, or even 1099s in most cases.
Adjustable-rate loans are available and can bring down your payment.Check your bank statement loan rate.
Bank statement loan guidelines
After all the above scenario guidance, you probably want to know bank statement loan qualification criteria. What kind of loan can you get?
10-25% down is required. The higher your credit score, the lower your bank statement loan down payment will be. If you’re refinancing. Once nice thing about bank statement loans is that mortgage insurance is typically not required with a down payment of less than 20%.
Typically not required, even for down payments less than 20%.
These loans are non-QM, but that doesn’t mean only non-traditional lenders offer them. Many mainstream national lenders offer bank statement loans alongside their standard products.
Expect to need a credit score of 620-660+, and higher for low down payments and the best rates. Some lenders will use the primary wage earner’s credit score to qualify, even if there’s a co-applicant on the loan.
Lenders want to see no collections and at least 2 years from the last foreclosure. Chapter 13 bankruptcies may require less seasoning if they were paid as agreed and discharged.
Housing payment history
You can typically only have one housing payment (rent or mortgage) that was 30 days past due in the last 12 months. Those living rent free are typically not considered for approval.
- Cash out
Your debt-to-income ratio can be as high as 40% for housing and 50% for housing plus all other debt payments.
1-4 unit residential homes, condos, and townhomes.
Property use / occupancy
- Primary residence
- Second home
- Investment property
- Short term rental
30-year fixed, ARM, 40-year with 10-year interest only period.
You must be self-employed 2+ years.
Most lenders require at least six months of reserves after the down payment and closing costs. Reserve requirements may be up to 12+ months for large loan amounts.
Typically $1-$5 million depending on the lender. Minimum loan amount is likely $100,000-$250,000.
Because these are non-QM loans, lenders are allowed to require prepayment penalties. Before agreeing to the loan, ask the lender about their prepay policy.
Some lenders allow you to use gift funds toward down payment and closing costs. Often, they will have a minimum personal funds contribution requirement of 5%. But they consider funds in your account 30-60 days as your own funds. So if you are getting a gift, simply let it sit in your account for a month, then use it for your entire down payment.
Some lenders require two appraisals for loan amounts above a certain amount, often $1 million.See if you are eligible for a bank statement loan.
More bank statement loan tips
Application: Use the bank account business name for your employer. For instance, Joe’s Bakery is your employer if that’s the self-employed business you’ll be using to qualify.
NSFs: The lender limits the number of NSFs you can have. Many NSFs indicate you have not managed money well. A few per year is probably okay but more than 5 or 10 and you may not be approved.
Income: Don’t guess income on the application. State no income for yourself when you apply. Leave it up to the lender to determine the highest possible income based on bank statements.
Bank statement loan alternatives
DSCR loans: Debt Service Coverage Ratio loans are perfect for buyers of investment properties who don’t want to prove income with tax returns. The lender looks at property cash flow instead of borrower income.
Asset Depletion: Rather than income, the lender uses a large cash reserve. They divide the sum by a certain number of months and use that number as income. For instance, $1 million in savings divided by 120 months is equivalent to an income of $8,333 per month.
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 applies to Non-QM loan, so you’re unlikely to find a true stated income loan.
1099 Loans: Some programs allow you to use one or two years of 1099s, or 1099s combined with bank statements to prove income.
P&L loans: With this loan, lenders use a profit and loss statement from your CPA to verify income.
Hard money loans: Hard money loans are considered short-term financing. They provide quick funds until you can stabilize a property and refinance it into long-term financing.
Bank statement loan pros and cons
- Close faster than when using complex tax returns
- No tax returns required
- Can often qualify for a bigger home price
- Use business or personal bank statements
- Higher mortgage rates
- Bigger down payment
- Higher credit scores needed
- Sizeable cash reserves required
Bank statement loan FAQ
A lender might deny a bank statement loan if 1) You have not been self-employed for 2 years; 2) You show inadequate income after the expense factor is applied; 3) Your self-employed income is less than 30% of W2 income.
You need to be self-employed for 2 years, preferably with regular deposits into business bank statements the entire time.
Yes. You can buy a house in cash, then reimburse yourself a portion of the cash outlay up to LTV maximums. For example, if you buy a house in cash for $300,000, and the lender allows an 80% loan-to-value, you may be approved for a loan of $240,000. You can even apply for the loan during the purchase process so the loan closes quickly after the home purchase.
Yes. Depending on the lender, they may not consider the potential payment if deferred longer than 12 months. However, some lenders may include an estimated payment of 0.50% to 1% of the loan balance into DTI ratios.
Some lenders let you use bank statements from up to 2 businesses if there is no transferring of funds back and forth.
Yes. Bank statement loans can be used to lower your rate, change your term, or take cash out.
NSFs are viewed unfavorably on bank statements because too many NSFs indicate you are not watching funds closely. About 5-10 NSFs per year are allowed.
Bank statement loans: a new way to buy or refinance
For the 15 million self-employed people in the U.S., a bank statement loan could change the way they look at financing property.
This program eliminates the hassle of supplying tax returns, just to find out you write off too many expenses to qualify.
Finally get into the home you want without the hassle and run-around.See if you can buy a home with a bank statement loan.