Across America, self-employed individuals are looking for the best bank statement loans to purchase a home.
For business owners or independent contractors who don’t have a salary, it can be challenging to find a regular home mortgage. Providing income documentation can be difficult if you don’t have the usual pay stubs and W2s.
Fortunately, some lenders have a bank statement loan program to address these challenges.
This type of loan is frequently utilized by self-employed, independent contractors, workers with seasonal wages, freelancers, and other people with inconsistent income sources.
Here’s a breakdown of the different loan types that use bank statements to determine eligibility and help you find the best bank statement loan for 2023.See if you’re eligible for a bank statement loan.
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What’s in this article?
For fixed-rate bank statement loans, the lender will generally review the last 12 or 24 months of bank statements to determine the borrower’s income. They use this financial data to calculate the maximum loan amount and loan terms.
Once the calculations have been completed, the lender can present the borrower with various fixed-rate loan options. Higher interest rates are typical, and the agreement could include a prepayment penalty.
The main advantage of fixed-rate bank statement mortgages is the certainty they offer.
By choosing a fixed-rate loan, you know what your payments will be over the life of the loan. This feature can help you avoid nasty surprises—like a sudden rise in index lending rates—that might happen down the road and give you peace of mind.
If you can only get approved for a higher interest rate mortgage right now, there will usually be an opportunity to refinance your mortgage in the future when rates are lower.
Before applying for a fixed-rate loan, or any mortgage loan, you must understand the monthly payments you can afford. Be honest about your income and expenses to ensure you can comfortably afford the loan payments.
A fixed-rate bank statement mortgage loan also enables you to budget your monthly payments more easily. Borrowers know precisely what their monthly payments will be and can plan their budgets accordingly.
Adjustable-rate bank statement loans are another type of loan based on the borrower’s bank statements. They are often used to finance the buyer’s personal property, investment property, or vacation home.
Adjustable-rate bank statement loans offer lower interest rates upfront, allowing buyers to finance more home and get better property cash flow.
It’s also not uncommon for borrowers to refinance their mortgage loan a few years after the initial agreement is signed, enabling them to get a better rate if market conditions have improved.
However, borrowers should check for prepayment penalties, if any, if they plan to refinance.
With any interest-only mortgage, you pay only the interest on the loan—typically for the first five or ten years.
The advantage of this is that the initial payments are less expensive.
- $500,000 loan amount
- 8% mortgage rate
- Fully-amortized P&I payment: $3669
- Interest-only payment: $3,333
In this case, choosing the “IO” option reduces the payment by more than $300 per month.
This is possible because you do not have to pay toward the total amount borrowed, otherwise known as the principal. However, most IO loans allow you to pay some principal if you’d like.
After the initial interest-only period, you start paying interest plus the principal for the remainder of the term.
A popular interest-only loan for the bank statement program is the 40-year fixed IO. You pay only interest for 10 years, then it converts to a regular 30-year fully-amortizing fixed loan.
While payment terms will vary between lenders, the interest rate you’ll pay will often reset to the prevailing rate when the interest-only period expires.
What that rate will be will depend on the real estate market and overall economy at the time—something very difficult to predict.
Your mortgage payments will eventually include the principal, which could cost you quite a bit more than what you initially paid monthly. Borrowers might try to refinance or negotiate the loan at that time with a cheaper rate (provided a better rate is available).
Other risks include if the house loses value, which means selling the property may not cover the total cost of the mortgage.
This type of mortgage may be a good choice for borrowers with a reliable source of income once the interest-only period expires and who are willing to assume the risk.
The main difference between jumbo bank statement loans and others are, not surprisingly, the size of the loan amounts—up to $7.5 million in some cases.
These large loans can be useful to borrowers with high incomes and larger sums available for a down payment. Like regular bank statement loans, the amount of money you might borrow can be assessed via bank statements of the last twelve months.
This information helps the bank statement loan lender assess your financial stability and income for a larger-than-average loan amount. Lenders need to have a reasonable expectation their customers can repay the loan.
Interest rates on these loans will likely be higher than other loan types as the lender is taking a bigger financial risk with a bigger loan amount.
Lenders who deal in jumbo bank statement loans are called non-QM lenders, a different type of mortgage product from those typically offered by conventional banks. Some lenders that deal in jumbo bank statement loans areSubmit your bank statement loan scenario.
While many lenders may require a higher credit score for a bank statement loan, a few will consider borrowers with lower credit scores.
If you have a low score, one way you can offset that handicap is with a larger down payment.
Borrowers with only 10% down must have a 90% LTV and a 720+ credit score. However, if the borrower can put 25% down, the LTV shrinks to 75%, and their credit score can be as low as 620.
Here are other examples of bank statement mortgage lenders and an overview of their requirements.
Angel Oak Mortgage Services offer a 24-month bank statement program that allows you to use both business and personal bank account statements.
- Loan amounts of $150,000 to $3,000,000 are available
- Credit score minimum is 660
- The maximum LTV is 85% with no MI
- Borrowers have to have two years of self-employment
- Investment properties or owner-occupied are accepted
- Four years seasoning after a foreclosure, bankruptcy or short sale
- Loans available in most states
Personal and business statements for the last 24 months can be used for Northstar Funding loans.
- Jumbo loans available for up to $5 million
- A minimum credit score of 680 is required
- A high level of 90% LTV is allowed
- Debt-to-income (DTI) ratios of up to 50% are allowed
- Investment properties and owner-occupied are allowed
- Only available in the following states: CA, CO, CT, DC, FL, IL, GA, MD, NC, NY, NJ, OR, PA, RI, and SC
3 month bank statement loans
You may have heard of 3 month bank statement loans. These are an alternative loan program within an alternative in that they require just 3 months of bank statements rather than the typical 12 or 24.
They follow the same general rules as regular bank statement loans, but come with higher rates.See if you’re eligible for a 3 month bank statement loan.
Unique property bank statement loan
As we’ve shown, some borrowers with non-traditional income methods require non-traditional loan products.
But there are also types of properties considered unique due to their construction materials that may also require alternative financing.
Unique property is a term Fannie Mae defines as “properties that represent unique housing for the subject neighborhood.”
Some examples of this type of “non-traditional” housing include (but are not limited to) log houses, earth houses, and geodesic domes.
Assessing the value of these homes can be tricky, as there won’t likely be many other homes of the same construction or style with which to compare them.
As Freddie Mac puts it, “appraisal accuracy [of the property] is enhanced by using comparable sales that are mostly similar to the subject property.”
Most, they say, are decided on a case-by-case basis between the underwriter and the appraiser to see if sufficient information is available to create a “reliable option of market value.”
A complicated housing or financial situation may require unconventional mortgage loan products to buy a home, depending on your finances and the home’s unique qualities.
If you’re looking to refinance or are interested in purchasing a unique property, here are several bank statement loan alternatives that might fit the bill.
A debt service coverage ratio loan (DSCR loan) is based upon the borrower’s ability to “service” or repay the mortgage loan based on the Net Operating Income (NOI) generated by an investment property. The higher this DSCR ratio is, the more NOI is available to repay the debt.
These loans are only allowed on rental or commercial real estate properties, not primary residences.Submit your DSCR loan scenario.
Is it possible to get any home loan if you don’t have legal residency status in the US?
If you’re a borrower who doesn’t have a Social Security Number (SSN), you might find it challenging to use traditional or conventional mortgage options. If this situation describes you, consider using your Individual Tax Identification Number (ITIN) from the IRS as a form of identification.
Some lending institutions work with such individuals to obtain an ITIN home loan. Beyond owning a home, this loan product has other benefits, like the ability to build and improve your credit score.
Businesses, including the self-employed, can request a profit and loss statement that tracks cash flow and helps determine profitability.
Typically, these statements cover a period ranging from monthly, quarterly, or annually, but you can also choose a period or frequency that suits your business needs.
A P&L statement can make for a smoother decision process when included with cash flow statements and balance sheets.
A hard money loan is based mostly on the value of the property in question—which will be used as collateral for the loan. These loans have the added benefit of not being based on the borrower’s creditworthiness.
However, conventional lenders and banks do not deal with hard money loans. Instead, they’re typically offered by private individuals or companies open to investing in higher-risk ventures.
These types of loans are frequently used by fix-and-flip renovators that plan to fix up and sell the property within a year of purchasing.
Hard money loans will almost certainly have higher interest rates—but they also rarely have terms longer than one to three years, meaning they should be paid off via a resale or refinancing relatively quickly.
Like other loan products listed here, a 1099 loan is mainly used by self-employed or independent /freelance contract workers who have challenges qualifying for a traditional mortgage loan.
But instead of tax returns, the lender can base their assessment of your application on your 1099 income. This IRS form is actually a collection of tax forms documenting types of payments made by an individual or business that frequently isn’t your employer.
Some lenders may require a minimum credit score of 680 as well as at least a 15% down payment.
Finally, an Asset Depletion mortgage is a home loan that is based on a borrower’s eligible assets instead of their employment income.
A lender that offers this mortgage will add up the value of all the applicant’s qualifying assets and divides it by a period (typically 120 to 360 months) to assess a hypothetical cash annuity stream.
This income can be included as part of the borrower’s “other income” on their mortgage application, frequently increasing the possibility of its approval.
Best bank statement loan FAQ
Bank statement loans don’t require submitting W-2s or tax returns to prove your income. Instead, bank statements are accepted by the lender as proof of income amounts.
If your income is inconsistent or your job doesn’t use paychecks, bank statement loans can help prove your eligibility. Doctors, lawyers, gig workers, and other self-employed people could fit this situation, to name a few.
In general, you provide the lender with your bank statement for the past year or two years, along with information about your business. This information might include a profit and loss statement, business account statements, and expenses.
Being an entrepreneur shouldn’t have to mean that the real estate market shuts you out.
Government statistics show 15 million people—equal to 10.1% of the total population—are self-employed.
It makes sense that lenders would make special mortgage programs for people with non-traditional incomes since there are so many out there in America.
If you’re self-employed, have too many write-offs, or just complex tax returns, a bank statement loan could be the solution you’ve been looking for.Start your bank statement loan.
Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.