Bank Statement Loan: What is it and Who Should Get One?

Some people don’t have a stable income for one reason or another, but that doesn’t mean they can’t get a loan. People whose income comes from sources that don’t match traditional income verification can get financing through a bank statement loan. 

These loans are perfect for self-employed borrowers, business owners, and other people with unpredictable incomes because they evaluate income using bank statement data instead.

In this article, we discuss the characteristics of bank statement loans. In the following sections, you will find out who this loan is for and how to get one. 

Key Takeaways:

• Self-employed people, independent contractors, and entrepreneurs with variable incomes all profit from these loans.
• Larger down payments and possibly higher interest rates are common requirements for bank statement loans.
• After removing inconsistent or one-time payments, lenders examine ongoing deposits to assess cash flow.

Understanding Bank Statement Loans

Instead of using traditional income verification such as W-2 forms, pay stubs, and tax returns, a bank statement loan assesses income using bank statements. They allow mortgage lenders to determine income by looking at deposits in personal or company bank accounts, in contrast to traditional loans. 

Since it doesn’t satisfy the usual federal requirements for conventional mortgage financing, this loan type is usually categorized as a non-qualified mortgage.

Loans based on bank statements are suitable for people whose income is inconsistent or difficult to confirm through conventional means. 

Small business owners, freelancers, and self-employed borrowers frequently have unpredictable income and significant tax deductions, which could lower the amount of money they declare on their tax filings. 

By examining bank account statements to record cash movement, these non-traditional mortgages enable borrowers to prove their income more precisely.

For borrowers with non-traditional sources of income, bank statement loans offer vital advantages. Because they lack official income papers or consistent pay stubs, self-employed people, entrepreneurs, and gig workers may have trouble being approved for traditional loans. 

These borrowers can obtain mortgages through non-traditional mortgages without conventional income verification.

To provide flexibility to borrowers who might not be able to meet the debt-to-income ratio standards of conventional loans, mortgage lenders may also apply greater loan limits or alternative qualifying conditions. 

This lending initiative increases access to mortgage financing by helping people with non-traditional financial profiles.

How it Works

First, everything starts with assembling the necessary paperwork to send to the lender. A profit and loss statement and personal or commercial bank statements, often spanning 12 to 24 months, are essential papers. 

Applicants who are self-employed might additionally be required to submit business permits and records of their operations. The bank statement loan lender will examine these bank statements as part of the application process to verify monthly deposits and cash flow.

Income Assessment

In order to evaluate cash flow without depending on pay stubs or tax returns, mortgage lenders determine the borrower’s income by examining deposits displayed in bank account statements. 

Inconsistent deposits, including one-time gifts or reimbursements, are frequently disregarded by bank statement lenders in favor of recurring contributions.

Some mortgage lenders use a calculation that considers average monthly deposits over a specified time period to calculate net income. 

Lenders can analyze the borrower’s ability to make mortgage payments with this evaluation, which takes the place of the conventional debt service coverage ratio or other income verification needed for conventional loans.

Lender Criteria

In addition to verifying income, these non-traditional mortgage lenders consider the borrower’s credit score, debt-to-income ratio, and type of business. To mitigate the risks connected with bank statement mortgages, lenders typically require a minimum credit score barrier, which is frequently higher than traditional loan restrictions.

Having sizable cash reserves or a bigger down payment can also be essential. Lenders may change loan terms, interest rates, and other requirements in response to the perception that bank statement loans are riskier than conventional mortgages.

Let’s clarify the details with a hypothetical example. You are a day trader and regularly purchase and sell currencies during the day. The gains from these deals, which might vary greatly from day to day, are what you get paid and what you consider your income. 

Because of this, it is challenging to be approved for a conventional loan using standard methods of confirming income.

With a non-traditional mortgage, you can demonstrate your income using the statements from your brokerage accounts. As an illustration, suppose your statements reveal the following withdrawals and deposits throughout the previous 12 months:

Month 1: +$5,000 (deposits) – $2,000 (withdrawals) = +$3,000 net income

Month 2: +$3,500 – $1,500 = +$2,000

Month 3: You made a loss.

…

Month 12: +$4,000 – $1,000 = +$3,000

The lender can calculate your typical monthly net revenue from trading activity by looking at these numbers. In this case, your typical monthly net income would be to sum all the amounts and divide them by 12. Even if your income fluctuates from month to month, the lender can use this information to determine your ability to repay the loan.

Fast Fact:

The establishment of the Bank of Amsterdam at the beginning of the 17th century is sometimes cited as the beginning of modern banking. In addition to stabilizing the value of the local currency, it served as a model for other central banks.

The Difference Between Bank Statement Loan and Traditional Mortgage

To assess income, bank statement mortgage loans require several months’ worth of personal or company bank statements. In contrast, W-2s, pay stubs, tax returns, and employer verification are used by traditional mortgages to determine income.

Bank statement mortgage loan programs avoid tax records that might not accurately indicate income for self-employed people by concentrating on the borrower’s cash flow as shown in their personal or corporate bank statements. Rather, traditional mortgage financing depends on thorough tax and job records.

Procedure for Approval

Self-employed people, business entrepreneurs, and individuals with inconsistent income who might not be eligible for traditional loan limitations can all benefit from bank statement loan.

Conventional mortgages favor salaried applicants and demand higher credit scores and steady income. While these programs generally allow for more flexibility with DTI calculations, acknowledging the financial diversity of non-traditional mortgage borrowers, DTI ratios are crucial in traditional lending arrangements.

Mortgage lenders evaluate each type’s risk profile differently, which affects qualifying requirements, including down payment, credit score, and income stability. 

Conventional loans frequently call for FHA loans or private mortgage insurance for smaller down payments, whereas bank statement loans can not require this but have larger down payments.

Differences in Cost

Compared to regular loans, bank statement loans have a riskier profile, which could result in higher interest rates and down payment requirements. 

Traditional mortgages can eventually become more cost-effective due to lower interest rates from higher credit scores and steady employment. Programs for non-traditional earners have a higher risk in their cost structure, making them perfect for people who don’t have traditional incomes.

Larger down payments are usually required for bank statement mortgage loans to reduce risk, which impacts the monthly payment and loan amount.

What are the Alternatives to Bank Statement Loans

Let’s discuss several alternative ways you have if you want to try something else other than a bank statement loan. 

Traditional Loans

The majority of mortgage lenders offer conventional loans. Generally, these loans offer better terms and interest rates than bank statement loan. Conventional loans fall into two categories: conforming loans, which follow the rules established by Freddie Mac and Fannie Mae, and non-conforming loans, which go beyond their restrictions.

Banks, credit unions, and other financial entities offer them. To be eligible for these loans, borrowers must fulfil specific requirements, such as solid credit history and proof of income. Conventional lending limits, which differ by location, apply to conforming loans.

FHA 

A government-backed choice for first-time homebuyers or those with poor credit scores is FHA loans. These loans may have cheaper closing costs and often have lower down payment requirements, sometimes as little as 3.5%. 

FHA loans are a good choice for self-employed people or borrowers with a history of financial troubles because of their more lenient qualifying requirements. However, mortgage insurance premiums are frequently associated with FHA loans, potentially raising the total cost.

VA 

Veterans, active duty members, and some surviving spouses can apply for VA loans. There is no down payment needed for these loans, which the US Department of Veterans Affairs supports. Additionally, VA loans may not need private mortgage insurance and have competitive interest rates. 

Many factors, including service history, determine VA loan eligibility. Borrowers looking for no down payment and reduced upfront fees will benefit from this loan option.

Asset Depletion

Asset depletion loans offer an alternative for those with significant assets but low incomes. By using some of the assets as evidence of the borrower’s financial stability, lenders may permit these assets to qualify the borrower for a mortgage. 

These loans may need a higher down payment and are more costly than conventional options. Owners of businesses or people with large net worths but little liquid income are the most outstanding candidates for this kind of financing.

DSCR 

Real estate investors are the target market for Debt Service Coverage Ratio loans. These loans assess the cash flow produced by investment properties rather than the borrower’s personal income. The lender determines whether the rental income is sufficient to pay the obligation. 

This option is a good fit for people with real estate portfolios who may not have a steady income from a typical career but do have a steady rental income. Because the investment property market is riskier, DSCR loans often have more loan ceilings but may also have higher interest rates.

Interest-Only 

For a predetermined amount of time, usually the first few years of the loan term, interest-only loans enable borrowers to make payments solely on interest. During the interest-only term, this choice reduces the monthly payment. 

The borrower does not, however, accumulate equity during this time because the principal debt stays the same. Borrowers who have not budgeted for the increased payments may experience financial pressure when the interest-only period expires and payments rise to cover both principal and interest.

Portfolio 

Rather than being offered for sale on the secondary mortgage market, the lender issues and retains portfolio loans. Since the lender is not subject to the same rules as those who offer loans to investors, these loans frequently have more lenient qualifying requirements. 

Borrowers with unusual financial circumstances, such as those having a mix of personal and business bank statements, are usually eligible for portfolio loans.

These loans are frequently accessible to current clients or those with a long history with the lender because they are not extensively publicized. When applying for these loans, investors who keep accounts with portfolio lenders might be at an advantage.

How to Apply 

After understanding how bank statement loans work, let’s follow all the necessary application steps.

Step 1: Research Lenders

Locate lenders that provide these programs. Direct mortgage lenders, credit unions, and mortgage brokers are frequent examples. Collaborate with brokers to acquire various possibilities from several lenders. 

Ensure the lender has experience with the particular documentation needs for non-traditional mortgages and specializes in working with independent contractors. Before proceeding, ensure they have the necessary licenses to operate in your state and evaluate their conditions and reputation.

Step 2: Collect Documents

Get the application’s required paperwork ready. Collect 12 to 24 months’ worth of personal bank statements to qualify for a personal bank statement loan. You will require business bank statements for the same time period if you are looking for a business bank statement loan. 

Make sure money doesn’t get mixed up between personal and company accounts. Prepare proof of assets and tax returns, if appropriate. Arrange any further supporting documentation, such as your credit report, and, if applicable, confirm the legitimacy of foreign bank statements.

Step 3: Pre-Approval and Loan Comparison 

To determine how much income qualifies for a loan, apply for pre-approval. Before submitting an official application, you can use this stage to assess loan amounts, terms, and possible interest rates. 

Examine offers from several lenders, paying particular attention to important details such as closing costs, bigger loan limitations, fees, and annual percentage rates. 

Examine the lender’s flexibility regarding loan amounts and down payment possibilities, as these can change depending on your credit score and financial background. Make sure the lender is open and honest about all associated costs.

Step 4: The Official Application Procedure

Fill out the official application with the lender of your choice. Send in your bank statements, supporting documentation, and other necessary documents. 

Be ready to explain any unusual or sizable transfers in your bank accounts throughout the application process, especially if you are a business owner, since these activities may be more frequent. 

As necessary for larger loans or higher-risk circumstances, ensure your documentation includes 12 – 24 months of reserves if you want a greater loan amount. Stay in touch with the lender at every procedure stage for timely updates.

Final Remarks

Self-employed people and others with non-traditional sources of income can obtain finance through bank statement loans. These loans evaluate financial stability using bank statements rather than traditional income verification techniques like tax returns.

The ability to fulfil paperwork requirements, the possibility of higher interest rates, and the demand for a down payment should all be considered when choosing to use a loan. 

FAQ:

Can I use my bank statements to obtain a loan?

Yes, bank statement loan is perfect for self-employed individuals or those with variable incomes. 

What is the required number of months for bank statements?

Lenders typically need bank statements from the previous six months to a few years to evaluate your financial practices.

Can banks detect fake bank statements?

Banks can spot fraudulent statements by examining transaction data, format consistency, and direct information verification.