What is a Bank Statement Loan?
Bank statement loans have taken over the traditional stated income loans as an alternative for borrowers who are unable to verify their income in the traditional way by providing the previous two years tax returns, W2s and pay stubs. These are non-QM loans, nontraditional loans or expanded criteria loans that allow other forms of documentation to prove the ability to repay. Just as it sounds, a bank statement loan allows the borrower to verify his or her income with bank statements.
Bank statement loans are popular with the following types of borrowers:
• Business owners
• Freelance employees
• Contract workers
• Independent contractor
• Sole proprietors
• Gig economy workers
These type of loans have provided a solution to borrower's challenge of using the net income claimed on their tax returns rather than the true net income that they make. This makes many borrowers ineligible for a loan. To apply for a bank statement loan, the self-employed borrower can provide the mortgage lender with as little as 12 months of bank statements which show regular deposits. This allows the lender to see how much you can afford to borrow. The lender would then verify your bank statements by calling your bank or by filling out a verification of deposit (VOD) request and mailing or faxing it to your bank. If you are using your business bank statements to qualify the lender will still need to see the expenses you incur as a result of owning a business but will not penalize you for expenses that you have written off on your tax returns.
What are the Differences Between a Bank Statement Loan and a Traditional Home Loan?
Bank Statement Loans
These loans are built for people who do not have W2 jobs such as business owners, realtors, consultants, restaurant owners, and gig economy workers (with a valid business license).
These loans allow the borrowers to use bank statements as the form of proof that they are able to pay back the loan amount.
Traditional Home Loans
These loans are for most employees (not self-employed) with a W2, which allows borrowers to choose from a variety of options, from short-term ARMs to 30-year fixed rates.
They generally require a minimum down payment of anywhere from 5% to 20% and a credit score of more than 700.
Advantages of a Bank Statement Loan
In summary, these are the advantages of a bank statement loan:
• The lender does not need to look at your tax returns or tax transcripts.
• Your income statements are made up of regular monthly income deposits.
• The lender can look at 12 or 24-month bank statements.
• If you own a business, you can show 24 months of business statements and a P&L statement for the same period. A P&L statement (profit and loss statement) is prepared by a Certified Public Accountant. Not all business owners will be required to present one.
• You can get a bank statement home loan for as little as 10 percent down.
• You can do a cash-out refinance loan of up to 85 percent of the value of your property.
• You can borrow up to $5 million.
• Typically, bank statement lenders will accept a debt to income ratio of a maximum 55 percent.
• You have the option of a fixed-rate or adjustable mortgage.
• You may have the option for an interest-only mortgage.
What are the Key requirements of Bank Statement Loans?
If you meet the following criteria, you may be eligible for a bank statement loan:
• You must have been a business owner or self-employed for at least two years.
• You must have at least 10% down (which is a 90% loan to value), as well as a 25% down payment for one-month bank statements.
• You must have four months of PITI reserves in the bank for loan amounts under $1 million and six months for loan amounts over $1 million.
• You may qualify with as little as a 1-month bank statement.
• You must have a credit score of 620 or above to qualify.
• The minimum loan amount is $100,000, and the maximum loan is $5,000,000.
The Key Eligibility Requirements for a Bank Statement Loan
Eligibility for a bank statement requires total deposits minus disallowed deposits. This amount is then divided by the number of bank statements, whether it is the 12 or 24 months statement.
Another option is that if the co-borrower is a W2 employee you can use a hybrid of W2 and tax return income from the co-borrower and bank statement income from the borrower or assets from the co-borrower and bank statements from the borrower. Non-QM loans can use multiples sources of blended incomes to qualify.
Deposits which are disallowed in regards to a bank statement loan include transfers between bank accounts and cash or large deposits, which can raise a level of concern and may require a letter of explanation.
Special Considerations for Bank Statement Loans
You may use statements form more than one bank account, but they cannot be a combination of personal and business accounts.
Deposits which are transferred from a business account into a personal account are acceptable.
You may combine W2 income with bank statement income as long as the income is not being double counted.
No commingling of funds.
Foreign Bank Statements and Foreign Assets may be considered and must be translated to English.
The Bank Statement Loan Application Process
To apply for a bank statement loan, you can upload the last 12 or 24 month's worth of bank statements from a business account into the system or have the digital mortgage software sync with your bank and pull the information from your account. Bank statement loans are processed through a manual underwriting process. Since these loans are being reviewed by a person, they can take between 21 and 30 days to process. For more complex cases, it may take up to 45-60 days.
Common Obstacles to Overcome
In the arena of bank statement loans, there are many exceptions to the rules. There are a number of roadblocks that you may run into, but many of them can be worked through. Read more to learn about the most common ones.
Signs You Are Living Beyond Your Means
Having a credit score below 600: credit bureaus garner information regarding your payment history. This includes outstanding loans and credit card payments. From this information, they compile a credit score which reflects your worthiness for credit. The score is ranked from a low of 300 to a high of 850. Lenders use this score to determine whether you qualify for a loan. Typically, a credit score below 600 means that you are not financially viable enough to be approved for a loan.
You are saving less than 5 percent: lenders want to see that you are not spending more than you make. If you are saving less than 5 percent of your income, then you will probably not qualify for a banks statement loan.
Your credit card balances are on the rise: if you are only paying the minimum due on your credit card balance and your balance is rising each month, you are not a likely candidate for a bank statement loan. To keep your debt under control, you should only charge what you can pay off each month.
Your house payments take up more than 28 percent of your income: if you're spending more than 28 percent of your gross income on your mortgage payments, then you are unlikely to qualify for a bank statement loan.
Your total payments (house plus the minimum payments on your credit report) take up more than 50 percent of your income: if you're spending more than 50 percent of your gross income on your mortgage payments, then you are unlikely to qualify for a bank statement loan. If you can prove that the business pays the payment then it will not be counted against you.
You are behind in payment of your bills: buying items on credit and paying off the balance in installments has become a popular way to live in the U.S. Problems arise when the bills start to spiral out of control. If a large proportion of your monthly income is taken up by this type of payment plan on top of your utility bills, it is unlikely you will be eligible for a bank statement loan.
Bank Statement Loan Success Story
If you're self-employed, your income is typically difficult to document, and you have a significant amount of tax write-offs. This can be problematic when you are looking to buy a home, and it can be tough to qualify for a traditional home loan. However, bank statement programs allow mortgage lenders to make loans without having to follow the traditional route of providing tax returns. This type of loan is great for people who are self-employed, independent contractors, or those who earn a seasonal income. These would-be home buyers are often more qualified than salaried employees, but their tax returns are far from run-of-the-mill.
Ricardo is an excellent example of how a bank statement loan can help someone who is self-employed or who owns their own business. Ricardo, as a successful self-employed construction worker, he had a healthy and regular income each month, but after writing off his expenses, he was unable to report sufficient income to qualify for a traditional loan.
Thanks to a bank statement lending program, Ricardo was able to apply for a bank statement loan without having to show his tax returns, which meant that his business write-offs were not a problem. Ricardoâ€™s monthly income bank deposits over the past 12 months were enough to qualify him for a bank statement loan. His bank statement showed:
Ricardo had a six-month average income of around $6,000 per month. After reviewing a full year of Ricardo's bank statements, the lender was able to approve a loan based on that amount. Although the down payment and interest rate were slightly higher than a traditional loan, Ricardo was happy to be able to purchase a home. Whatâ€™s more, he could always return the following year and if he could report an increase in income he would have the option of refinancing with a conventional loan which could have a lower interest rate.
Bank Statement Loans FAQ
How do bank statement loans work?
For all home loans, lenders need to verify your income before approval. In the case of bank statement loans, bank statements are used as income verification instead of W2s and your tax return. Typically, bank statement mortgage loans require 12 or 24 month's worth of bank statements. However, in some cases, you may be able to get approved with only one month's worth of bank statements. One of our loan officers will then manually review your bank statements and verify the information with your bank.
Because of this alternative income-verification method, bank statement mortgages have become a popular option for self-employed individuals whose W2s and tax returns would not accurately reflect their full income.
What do mortgage lenders look for on bank statements?
When lenders are reviewing your bank statements to determine whether they can approve you for a loan they are looking for the following information:
• Positive account balance
• Little to no overdrafts
• Regular monthly income deposits
• Enough money to cover at least 10% down payment
• Enough money to cover several month's worth of mortgage payments as well as closing costs
• When income was deposited into your account (generally, they want the income to be seasoned, meaning it's been in your account for a while and wasn't all just deposited right before you applied for your loan)
How many month's worth of bank statements do I need for a loan?
It depends. On most of our personal and business bank statement loans, we require the last 12 or 24 month's worth of bank statements.
In some cases, we do allow one-month bank statement loans. If you're only providing one month's worth of bank statements, you will need to attest and declare your qualifying income and your account balance must be positive.
Can I get a bank statement loan if I am not self employed?
Yes, retirees can also qualify for bank statement loans since they are not receiving a typical stream of income that would be accurately reflected on their income tax returns.
It's important to clarify that loans for self-employed individuals can apply to a variety of situations including those who are business owners, freelance works, gig economy workers, and realtors.
Are there other types of loans that require bank statements?
There aren't any other loans that require bank statements, but you can use bank statements as a way to prove your income and qualify for other types of mortgages. In fact, you can use bank statements as one source of income verification for many of our Non-QM loans, such as jumbo loans and asset-based loans.
Are there other types of home loans for self-employed borrowers?
If you're looking for a self-employed mortgage, a bank statement loan is usually the best option. However, depending on your other sources of income, such as a full-time job in addition to your self-employed business endeavors, there may be other loan options for you to consider, such as:
• Asset-based loans
• VA loans
• FHA loans
• Jumbo loans
Fidelity Residential is proud to offer several self-employed home loan products including both personal and business bank statement loans. Whatever your employment and income circumstances, our loan officers can help find the best mortgage solution for your needs.