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- A bank statement loan is a type of mortgage that uses bank statements to help the borrower qualify for financing.
- These mortgages are geared toward self-employed borrowers who could benefit from using bank statements in lieu of tax returns.
- Bank statement loans are a type of non-QM loan, which often come with higher mortgage rates.
Though it might not seem fair, self-employed borrowers often have a harder time qualifying for a traditional mortgage, even if they can afford one. But that doesn’t mean getting a mortgage is impossible for self-employed people.
Many mortgage lenders have solutions to help borrowers who run their own businesses become homeowners. Bank statement loans provide business owners a way to qualify for a mortgage without sacrificing any of their businesses’ tax breaks.
How does a bank statement loan work?
When getting a mortgage, borrowers are required to provide a bunch of documents proving that they have to income to afford the loan. Mortgage lenders want to be sure that a monthly mortgage payment won’t push your debt-to-income ratio too high and put you at risk of default.
Traditionally, this is done with W-2 forms and tax returns that show the taxable income the borrower has earned in the previous two years. But for borrowers who are self-employed, providing the traditional documentation can be tricky.
Bank statement loans enable these borrowers to apply using bank statements instead of tax documents. For those who have enough income to afford a monthly mortgage payment but struggle to qualify for a conventional mortgage, a bank statement loan can make homeownership possible.
“These loan programs were designed to serve the self-employed borrower community and give them a product that can be underwritten adequately to control risks but to also give well-qualified entrepreneurs a tool to achieve homeownership,” says Jon Bodan, strategic financing advisor at Real Estate Bees and president of mortgage lender The Perpetual Financial Group.
How to qualify for a bank statement loan
Because bank statement loans don’t use the traditional methods to qualify a borrower, they’re considered a type of non-QM loan. Non-QM loans are mortgages don’t fit the criteria to be considered a qualified mortgage.
Qualified mortgages have certain qualities that make them safer for consumers, including using specific types of documentation to verify a borrower’s income. Non-QM loans can be riskier for both the lender and the borrower, so they tend to be more expensive.
To qualify for a bank statement loan, you’ll generally need to provide between 12 to 24 months worth of consecutive bank statements. The lender will use this to determine your net income.
You’ll likely also need a down payment of at least 10% and a credit score that’s at least in the high 600s to get approved for one of these mortgages.
Where to get a bank statement loan
You might find that working with a mortgage broker makes your search easier, since brokers can find you loan options from a variety of lenders and make it easy for you to compare offers.
Or, if there’s a specific lender you want to work with, you can always give them a call and see if they offer bank statement loans. Not all lenders advertise their non-QM offerings online, so it’s definitely worth asking a lender if they can work with you.
Bank statement loan lenders
New American Funding is a lender that will work with self-employed borrowers who want to use bank statements to qualify for a mortgage. It’s also one of our best mortgage lenders for first-time buyers.
Bank statement loan pros and cons
The main benefit of getting a bank statement loan is being able to use alternative documentation to show your income.
As we mentioned, borrowers are traditionally expected to show W-2s and tax returns when applying for a mortgage. But self-employed borrowers don’t typically receive W-2s, and their tax returns often show them earning less income than what they actually earn.
“Many self-employed borrowers write off practically everything on their tax returns so they can minimize their tax liability, but they have plenty of cash and cash flow to service a mortgage successfully,” Bodan says.
By using their bank statements to show how much income they’re pocketing after taxes and business expenses, these borrowers can successfully show lenders that they have the finances to afford a mortgage.
But one of the downsides of bank statement loans is that they’re typically more expensive than traditional financing options.
“The biggest drawback to a bank statement loan is that it is a non-traditional mortgage,” says Bodan. “So they carry higher interest rates and closing costs, and usually require a larger down payment.”
Bank statement loans frequently asked questions
You can get a mortgage using just bank statements to prove your income, but remember that these types of loans are typically a bit more expensive than traditional, qualified mortgages.
When applying for a bank statement loan, you’ll typically be required to provide one to two years worth of consecutive bank statements. You’ll also need a high credit score and a large down payment.
Most lenders want to see a down payment of at least 10% from bank statement loan borrowers, though some lenders may require more, depending on your finances.
It can be harder for independent contractors to show income when getting a traditional mortgage, but it’s not impossible. If you’re an independent contractor and you don’t qualify for a conventional loan but feel that you can afford a mortgage, you might benefit from applying for a bank statement loan or a 1099 mortgage.