Bank statement loans are a type of mortgage designed for self-employed individuals, freelancers, and business owners who may not have traditional income documentation, such as W-2s or tax returns, to verify their income. Instead of using conventional income verification methods, lenders base approval on the borrower’s bank statements to assess their cash flow and ability to repay the loan.

Here are the Key Features of Bank Statement Loans

• Income Verification through Bank Statements: Instead of requiring tax returns or pay stubs, lenders ask borrowers to provide 12 to 24 months of personal or business bank statements to verify their income. Lenders review the cash flow, deposits, and average balances to determine whether the borrower can afford the mortgage payments.


• Target Audience: 1. Bank statement loans are ideal for self-employed individuals, business owners, independent contractors, or gig workers whose income may be inconsistent or difficult to document using traditional methods.


• 2. Borrowers with large amounts of deductions or write-offs on their tax returns, which reduce their taxable income but don’t reflect their actual cash flow, can also benefit from this type of loan.


• Higher Down Payments: Bank statement loans typically require a larger down payment compared to conventional loans. While the exact amount can vary, it usually ranges from 10% to 30% of the property’s purchase price, depending on the borrower’s financial profile.


• Higher Interest Rates: Since bank statement loans are considered higher risk than conventional mortgages, they often come with higher interest rates. Borrowers should be prepared to pay slightly more for this flexibility in income verification.


• Credit Score Requirements: Bank statement loans typically require a higher credit score than traditional loans, with a minimum credit score of around 660 to 680. However, borrowers with higher credit scores may be able to secure more favorable terms and lower rates.


• Debt-to-Income Ratio (DTI): Lenders will assess the borrower’s debt-to-income ratio, though they may be more lenient than they would be with conventional loans, given the different nature of income documentation. Many lenders will cap the DTI at around 43-50%, depending on the specific terms.


• Personal vs. Business Bank Statements: Borrowers may use either personal or business bank statements, depending on their financial setup. If business bank statements are used, the lender may apply a percentage (e.g., 50-70%) of the deposits to account for business expenses.


• Loan Terms: Bank statement loans come with a variety of term options, such as 15- or 30-year fixed-rate mortgages, as well as adjustable-rate mortgages (ARMs). Borrowers should discuss their options with the lender to find the best fit for their financial situation.


• Property Types: These loans can be used for a variety of property types, including primary residences, second homes, and investment properties.


• Lender-Specific Program: Bank statement loans are often offered by non-traditional lenders or private mortgage companies, rather than through conventional banks or government-backed mortgage programs. Each lender may have its own set of rules and guidelines for approving these loans.

Pros of Bank Statement Loans

• Flexible Income Documentation: Allows self-employed borrowers and those with fluctuating income to qualify for a mortgage.


• No Need for Tax Returns: Ideal for individuals who don’t want to use tax returns or have substantial tax deductions that lower their reported income.


• Can Be Used for a Variety of Properties: Offers flexibility for purchasing primary residences, second homes, or investment properties.

Cons of Bank Statement Loans

• Higher Interest Rates: Due to the increased risk to the lender, interest rates are typically higher than those on conventional loans.


• Larger Down Payment: A larger down payment is often required, which may limit access for some buyers.


• Stricter Qualifications: Lenders may have stricter credit score and DTI requirements to offset the risk of not having traditional income verification.

Bank statement loans are a valuable option for self-employed individuals or those with non-traditional income who can demonstrate their ability to repay the loan through consistent cash flow in their bank accounts. However, they often come with higher costs and stricter requirements compared to conventional loans.