A bank statement loan is a type of mortgage that documents a borrower’s income using bank deposits rather than tax returns and W-2s. It is used most often by self-employed borrowers, whose tax returns may show much lower income than the business actually brings in once deductions and write-offs are taken.
This guide covers how these loans work, how lenders calculate income from bank statements, what lenders commonly require, and the tradeoffs compared with conventional financing.
Why bank statement loans exist
Standard mortgage programs such as conventional, FHA and VA loans calculate a self-employed borrower’s income from tax returns, usually as a two-year average of net income after expenses.
Tax returns are designed to show taxable income, and business owners often reduce that figure through legitimate deductions. As a result, a business owner can have steady cash flow and still show a net income on paper that is too low to qualify for the home they are considering.
A bank statement loan approaches the question differently. Instead of starting from net taxable income, the lender looks at deposits over a period of time and estimates income from those.
What “non-QM” means
Bank statement loans fall into a category called non-QM, which stands for non-qualified mortgage.
A “qualified mortgage” is a set of federal standards administered by the Consumer Financial Protection Bureau. Most conventional, FHA and VA loans are designed to meet those standards. Loans that fall outside them, including loans that document income in nontraditional ways, are called non-QM.
Non-QM does not mean unregulated. Federal ability-to-repay rules still require lenders to make a reasonable, good-faith determination that a borrower can afford the loan. A bank statement loan simply uses a different kind of evidence to make that determination.
How lenders calculate income from bank statements
Methods vary from lender to lender, which is one reason the same borrower can see different results from different lenders.
Statement period. Lenders commonly review either 12 or 24 months of statements.
Personal statements. When personal account statements are used, lenders generally total the qualifying deposits and calculate a monthly average. Deposits that are not income, such as transfers between your own accounts or loan proceeds, are usually excluded.
Business statements. Because not all business revenue is personal income, lenders apply an expense factor to business deposits. Some use a standard percentage. Others allow a profit and loss statement or a letter from a CPA or tax preparer showing the business’s actual expense ratio.
Lenders may also look closely at large or irregular deposits and ask for documentation of their source.
What lenders commonly require
Each lender sets its own guidelines, but bank statement programs often share these features:
- A history of self-employment, frequently two years, verified through a business license, a CPA letter or similar documentation
- A larger down payment than many conventional loans, often 10 percent or more, depending on the lender and the borrower’s credit
- Minimum credit scores that vary by lender and by the size of the down payment
- Reserves, meaning a set number of months of mortgage payments remaining in savings after closing
Depending on the lender, bank statement loans may be available for a primary residence, a second home or an investment property.
Who typically uses them
Bank statement programs are designed for borrowers whose income is real but does not show up clearly on tax returns. That commonly includes:
- Small business owners with significant business deductions
- Independent contractors paid on 1099s
- Commission-based earners, such as real estate agents
- Owners of newer businesses whose earlier tax years do not reflect current income
Borrowers paid on a W-2 generally qualify through standard income documentation, so bank statement programs are rarely relevant to them.
Tradeoffs compared with conventional loans
Bank statement loans typically carry higher interest rates and fees than conventional loans, and they usually require a larger down payment. Some non-QM loans also include a prepayment penalty, a fee for paying off or refinancing the loan within a set number of years. Loan terms, including whether a prepayment penalty applies, are listed in the loan disclosures and are worth reviewing carefully.
The central question for most borrowers is how far apart their tax-return income and their actual income are. When tax returns already support the loan amount needed, conventional financing is usually available on standard terms. When they fall well short, a bank statement loan is one alternative.
Some borrowers who start with a bank statement loan later refinance into a conventional loan once their tax returns show enough income to qualify. Whether that makes sense depends on market conditions at the time, the borrower’s qualifications and any prepayment penalty on the original loan.
Other non-QM programs
Bank statement loans are one of several non-QM options. Others include:
- DSCR loans, which qualify an investment property based on its rental income rather than the borrower’s personal income
- 1099-only programs, which use 1099 forms instead of full tax returns
- Profit and loss programs, which rely on a P&L statement, often prepared by a CPA
- Asset-based programs, which estimate qualifying income from a borrower’s savings and investments
Not every lender offers non-QM programs, and guidelines differ significantly among those that do. For a broader look at how self-employed income is evaluated, see getting a mortgage when you’re self-employed. For how lender access differs between brokers and banks, see mortgage broker vs. bank.
Getting ready
Borrowers exploring a bank statement loan usually start by gathering 12 to 24 months of statements for the accounts where their business income is deposited, along with documentation of how long they have been self-employed and how much they plan to put down.
This article is general information, not financial or legal advice. Lending guidelines vary by lender and loan program and change over time. Questions about your own situation? Contact us.