Hard to Get a Bank Statement Loan Tips and Advice

Are you a self-employed buyer who is having trouble getting approved for a mortgage?

Traditional mortgages require extensive documentation of income and expenditure, including tax returns.

But with a bank statement loan, you can use your business or personal bank statements to verify income instead. Bank statement loans are designed to meet the needs of self-employed borrowers, making it easier and faster to get approved.

We’ll look at eight ways a bank statement loan can benefit self-employed buyers.

It’s not hard to get a bank statement loan—if you’re the right kind of buyer

This alternative documentation loan type looks at the deposits in your bank account over the past 12-24 months to determine your income. It’s designed for self-employed borrowers who may not have traditional proof of income.

Most lenders will look for a minimum of two years of self-employment with steady deposits over that time.

If you just started your business, or recently started making money, it could be difficult to get approved.

But for those with a solid business, it could be even easier to qualify for a bank statement loan than conventional financing.

How does a bank statement loan work?

To determine your eligibility for a bank statement loan, lenders will look at your average monthly deposits over the past 12-24 months and multiply them by an “expense ratio,” usually 50%.

The expense ratio takes into account any expenses associated with running a business and helps to ensure that you can afford to make payments on the loan.

Bank statement loans are becoming increasingly popular among self-employed individuals because they offer more flexibility than traditional loans. They also typically require less paperwork and have fewer restrictions on how you use the funds.

8 scenarios that make bank statement loans easier than traditional

1. You have 2 years of self-employment, but high income only in the past year

For self-employed borrowers, getting a traditional mortgage can be difficult if their income fluctuates yearly.

However, with a bank statement loan, lenders can use the most recent 12 months of bank deposits to calculate average monthly income. You may still qualify for a mortgage if you had a profitable year but previous years were not as successful.

A rule of thumb is, the fewer months of bank statements you provide, the higher the rate will be. In fact, there are even 3-month and 1-month bank statement loans.  Still, they can be a good option for self-employed borrowers who have had trouble getting approved for a conventional mortgage.

2. You make almost no money “on paper”

Real estate investors and business owners often write off expenses to reduce their tax liability, making it difficult to qualify for a traditional mortgage.

The difference with a bank statement loan is that lenders use bank deposits to verify income, rather than tax returns. This can be a great option for borrowers who make a lot of money but show low income on paper.

You can still qualify for a loan even if tax returns don’t show enough income. This is because tax returns only show vague numbers. They deduct all of your expenses, so it shows you don’t really have much profit. You do, but you get to take those tax breaks. Unfortunately, with certain loans, it can’t consider that factor.

Here’s an illustration on how much more you could qualify for with a bank statement loan.

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.

3. You have complex tax returns

Some self-employed borrowers have complex tax returns with multiple schedules and K-1 forms. This can make it difficult for underwriters to understand their true income.

Lenders can look at deposits into personal or business bank accounts to determine monthly income when you apply with a bank statement loan. When you have deposits in your bank accounts, it shows you have money coming in, and it’s reliable, which is what they want to see.

Seasonal businesses often encounter difficulty when trying to qualify for a traditional loan because their income varies from month to month. A bank statement loan allows lenders to look at average deposits over the last year or more to determine eligibility.

As long as you’re making enough to cover expenses and have a consistent deposit history, you can still qualify for a loan.

4. Your business partners don’t want to share tax returns with your lender

Business partners may not want to share their tax returns with a lender, especially if they’re not applying for the loan. If you’re a 25% or greater owner in a company, you have to qualify for a traditional mortgage with business and personal tax returns.

Your business partners may not appreciate you sharing the business returns with a lender. In these cases, it’s easier to get approved showing distributions to your personal accounts. Or, if you’re 50% or greater owner of the business, use business bank accounts to qualify.

With a bank statement loan, borrowers can qualify based on bank deposits to personal accounts or business accounts, depending on their ownership stake in the company. This can be a good option for borrowers who want to keep their financial information private.

5. You have a low-overhead business like a Realtor or freelancer

Bank statement lenders can offer lower expense ratios for businesses with low overhead, making it possible to use up to 80-100% of bank deposits to qualify rather than the standard 50%. This gives more leeway in qualification amounts since 80% of bank deposits may exceed after-expense income reported on tax returns.

Consequently, this may enable applicants to purchase a larger residence than they would if qualifying with tax returns.

6. You make 1099 income

For gig workers and consultants who receive multiple 1099s, it can be difficult to achieve a traditional mortgage.

With a bank statement loan, lenders can include your bank deposits in combination with 1099s to verify income. This can be an excellent option for borrowers who claimed too many write-offs in the previous year but still have a high income.

For example, let’s say you are an Uber driver so you write off the majority of your gas, vehicle payments, vehicle insurance, and other related expenses, this decreases your “profit” in many scenarios.

Lenders can use bank deposits to verify your monthly income and approve you with a bank statement loan. This type of loan is an excellent option for such applicants because it takes into account their real income rather than just relying on tax returns.

7. You’re an early retiree FIRE type

The Financial Independence, Retire Early (FIRE) movement has created a new group of retirees who don’t have traditional W2 income. For early retirees who receive regular dividend and interest payments, lenders may be able to use this income to qualify them for a bank statement loan.

This is ideal for early retirees because they don’t necessarily have to provide tax returns, and their income can still be verified.

8. You have a mix of W2 and self-employed income

For borrowers with a mix of W2 and self-employed income, lenders can use a combination of bank statement income and W2 income to qualify. This may be a better option for borrowers who have had both income streams for more than two years and want to use their self-employed income to qualify for a larger mortgage.

Your self-employment income must be more than 30% of total income.

Could a bank statement loan be perfect for you?

For self-employed homebuyers, bank statement loans offer a refreshingly modern way to verify income. Instead of relying on tedious tax returns, these innovative mortgages allow borrowers to utilize bank deposits alone.

This convenient loan option makes it easier than ever for the self-employed to purchase their dream homes without having to navigate complex qualification rules and paperwork headaches.