Bank Statement Loans: Who They Are For, How They Work, and When to Use Them

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Bank statement loans, also known as self-employed mortgages, allow you to secure a mortgage without the documentation you would normally use to verify your income, such as W-2s and tax returns. These loans, sometimes known as "alternative documentation loans," are largely used by entrepreneurs and others who might not have consistent income or a single employer to prove their salary.

With the rise of the gig economy, there are now somewhere between 15 and 27 million Americans who get some or all of their income from self-employment. Fortunately, a number of lenders offer bank statement loans, which provide more flexible alternatives to proving your income and assets.

How Bank Statement Loans Work

Instead of requiring tax returns, W-2s, pay stubs, and employer verification forms, bank statement loan applicants can use their personal and/or business bank accounts to prove their income and cash flow. 

You’ll still have to provide some of the same documentation as you would for a regular loan, of course--and often more. Below are the typical requirements for a bank statement loan.

  • Twelve to 24 months of personal or business bank statements
  • Two years’ history as a self-employed professional
  • Decent credit score (the exact score minimum varies, depending on the lender)
  • Enough cash or liquid reserves to cover several months of your mortgage payment
  • Verification of any liquid assets, like a 401(k) or mutual fund investment
  • A business license, if applicable
  • A letter from your tax preparer or accountant validating your business expenses and confirming that you file your returns as an independent contractor

The exact requirements vary from lender to lender. For example, some mortgage lenders may accept lower credit scores than others, and some may allow gift funds while others will not. 

If you don’t meet the requirements for one lender, be sure to shop around and see if you meet the criteria for another.

Since these loans are slightly riskier for lenders, they may require larger down payments than conventional loans, and have higher interest rates.

Who May Benefit From a Bank Statement Loan?

Bank statement loans are often used by borrowers who have inconsistent cash flow or can’t get income documentation from an employer, such as consultants, freelancers, small business owners, doctors, lawyers, and real estate investors and agents.

If you fall into this category, you may not be able to qualify for a conventional or FHA mortgage loan because the income on your tax returns—which is often adjusted for deductions and business write-offs—might not reflect the true amount of income you’re earning. Your bank statements, however, tell a different story, allowing you to qualify more easily.

Existing homeowners can also use bank statement loans when refinancing their mortgages. If you’ve quit the traditional workforce since purchasing your home, but would still like to enjoy the benefits of refinancing, these loans may be a good option.

Advantages of Bank Statement Loans

  • No tax returns, W-2s or pay stubs required

  • High debt-to-income ratios allowed 

  • High loan limits

  • Can be used on primary residences, second homes, and investment purchases

Disadvantages of Bank Statement Loans

  • Potentially higher interest rates

  • Larger down payments may be required

  • Not offered by every lender

Other Alternatives

Keep in mind that some self-employed people can qualify for a traditional loan. Most lenders verify income by looking at the average of the last two years of your tax returns. So if you’ve been self-employed for a significant amount of time (at least two years) and your income has remained steady or grown during that time, you may still be a candidate for a conventional mortgage.

A larger down payment and good credit can also help your chances of getting a mortgage as a self-employed person, as can having a co-borrower with a high credit score. These factors may also qualify you for a lower interest rate.

Finally, consider using a mortgage broker to help with your loan shopping. These professionals have access to a wide variety of lenders, so they may be able to point you to a specialized loan program that fits your needs.

Article Sources

  1. Bureau of Labor Statistics, "Self-employment in the United States" Accessed Oct 30, 2019

  2. Home Life Mortgage: Self-employed? "Buy a Home with a Bank Statement Mortgage," Accessed Oct 30, 2019 

  3. Consumer Financial Protection Bureau, Definition of Self-Employed Consumer

  4. Freddie Mac: Self-Employed Mortgage Application Tips

  5. Bureau of Consumer Financial Protection: Ability-to-Repay and Qualified Mortgage Rule 

  6. Refi Guide: Why Bank Statement Loans Are the New Stated Income Mortgage Program Helping to Finance the Self-Employed Borrowers in America 

  7. Fannie Mae: Underwriting Factors and Documentation for a Self-Employed Borrower 

  8. Consumer Financial Protection Bureau: What is the difference between a mortgage broker and a mortgage lender?