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Written by
Ruben Caginalp
Ruben Çağınalp is a former associate writer on Bankrate’s Home Lending team. A graduate of Fordham University, he began his professional career with Bankrate in January 2022, where he now covers the housing market, real estate and mortgages.
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Laurie Richards
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Jeffrey Beal
Jeffrey L. Beal, president of Real Estate Solutions, has 40 years' experience in multiple phases of the real estate industry.
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If you’re self-employed or a gig worker looking to buy a home, a bank statement loan might help. With this loan, you use bank statements rather than tax returns for mortgage preapproval.
A bank statement loan allows you to apply for a mortgage without having to prove your income via pay stubs, W-2s or tax returns. Instead, lenders use recent bank statements to assess your earnings.
This loan type can be helpful if your income is inconsistent, your employer doesn’t issue traditional paychecks or you claim significant tax deductions. This might apply if you’re self-employed or a small business owner, doctor, lawyer, real estate agent or investor.
“One example would be if your tax returns show that you made $100,000 last year when you really made $200,000 because you were able to deduct an expensive printing machine you bought,” says Brad Seibel, president of Sage Home Loans Corp. “Your bank statements, rather than your tax returns, would adequately show your income.” (Editor’s note: Sage Mortgage is owned by Bankrate parent company Red Ventures.)
Bank statement loans are considered riskier than typical mortgages, and many banks and mortgage lenders don’t offer them. That’s because they’re non-qualified mortgages (non-QM), meaning they aren’t backed by Fannie Mae and Freddie Mac, so there’s less protection for lenders and borrowers.
Non-QM mortgages include any loan that doesn’t meet the conforming standards set by Fannie and Freddie. These standards cover characteristics like the maximum loan amount and debt-to-income (DTI) ratio.
Non-QM loans allow more borrowers to qualify for a loan. However, they tend to have higher interest rates, meaning they cost more. They also lack some of the consumer protections that conforming loans have. For example, a non-QM loan could negatively amortize or include a balloon payment.
When you apply for a bank statement loan, you’ll provide the lender with bank statements as far back as two years. This includes statements for personal and business accounts. You’ll also need to disclose other information about your business and expenses, if applicable.
“The type of business, the number of employees and whether the business has a physical location are some of the questions that bank statement lenders will want to know to decide the expense factor,” says Darrin Seppinni, president of HomeLife Mortgage, a California-based lender specializing in bank statement loans.
The lender then analyzes your income to determine your net income. From there, if you meet the lender’s other requirements, you’ll be preapproved for a certain loan amount.
Let’s assume you’re self-employed, have a credit score of 740 and want to purchase a home. Your income fluctuates month to month, averaging out to $6,875. You also put $800 a month toward other debt payments. If the lender allows a DTI ratio of up to 45 percent, you could potentially qualify for a mortgage with a monthly payment of about $2,295. The exact number will vary widely based on current mortgage interest rates, your down payment and other factors.
Traditional mortgages, such as 30-year fixed-rate conventional or FHA loans, are more common than bank statement loans. They are geared toward borrowers with consistent, verifiable income documented on pay stubs, W-2s and tax returns. You can get approved for a conventional loan with a down payment as low as 3 percent and a minimum 620 credit score.
However, bank statement loans are far less common. They cater to self-employed borrowers or those with inconsistent income. Typically, they come with eligibility guidelines that differ from traditional mortgages.
Generally, you can qualify for a bank statement loan with a credit score as low as 620, but 700 or higher gets you a better rate and terms. If your credit score is on the lower end, though, you might also need to make a larger down payment. Doing so lowers the risk posed to the lender.
Overall, expect to meet the following requirements:
A bank statement mortgage loan might be right for you if your tax returns don’t adequately reflect your income. Fact is, many self-employed workers are eligible for other, more traditional types of mortgages, even with inconsistent income. Given that bank statement loans have considerable downsides, it’s crucial to carefully consider all options. Ultimately, you want to try a conventional loan first.
But there are scenarios where it might make more sense to get a bank statement loan, such as if you’re self-employed and heavily use tax write-offs to minimize your adjusted gross income (AGI). Or maybe you’re a small business owner who acquires new businesses, but your personal income taxes are significantly reduced due to large one-time payments.
Borrowers like these will likely face challenges when seeking a conventional or jumbo mortgage loan. But a bank statement loan offers a viable solution, as it assesses income based on bank statements rather than AGI from tax returns or pay stubs.
Good candidates for a bank statement mortgage include:
You might also consider a bank statement loan if your income can’t be documented in a traditional way. For example, some employers pay workers via prepaid cards instead of direct deposit.
Bank statement loans give non-traditional income earners the chance to buy a home. Still, they aren’t without drawbacks. Weigh the pros and cons when deciding if this mortgage option is right for you.
If you aren’t already working with a mortgage lender who offers bank statement loans, a mortgage broker might be able to help you find one. Brokers often have partnerships with several wholesale lenders, which gives them access to various unique mortgages and deals.
Brokers typically don’t charge borrowers for their services. Instead, they charge the lender, who then passes the cost onto you in the form of fees or a higher rate.
When comparing brokers, ensure whoever’s on your shortlist is licensed to work in your state and has experience with bank statement loans. Once you choose the right fit, connect with them to explore lenders that can assist you with securing a bank statement loan.
With a shortlist of lenders in hand, here’s how to move forward:
Bank statement loans are one way for people to borrow money, but there are other mortgage loan options. Unlike bank statement loans, these options typically don’t require years of financial records and are typically less expensive to get. These alternatives include:
It might be challenging to find a bank statement loan lender, but it’s not impossible. Some even specialize in this type of loan. If you can provide bank statements to prove your income and meet the lender’s other guidelines, getting approved might not be difficult at all.
It depends on the loan amount you’re seeking. You’ll need enough funds to cover the minimum down payment and closing costs, as well as some reserves in your accounts. Learn more about how much of your income should go to a mortgage.
Arrow Right Former associate writer, Home Lending
Ruben Çağınalp is a former associate writer on Bankrate’s Home Lending team. A graduate of Fordham University, he began his professional career with Bankrate in January 2022, where he now covers the housing market, real estate and mortgages.
