What are bank statement loans?

When people apply for a traditional mortgage, they typically must provide W-2 forms and tax returns as proof of income, along with numerous other documents.

If you’re buying a house as a self-employed borrower, independent contractor, or gig worker, you may not have a W-2 to show a mortgage lender. Business owners often have complex tax returns that don’t accurately reflect their income since they may deduct extensive business expenses.

A solution that some mortgage lenders offer is a bank statement loan — one that relies on your business bank statements to prove your income and expenditures and help determine how much you can borrow. It can be a great fit for home buyers without “traditional” sources of income.

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Bank statement loans are part of a category of loans called “non-qualifying mortgages,” or non-QM loans, which don’t meet the standards for mortgages established by the Consumer Financial Protection Bureau (CFPB). Qualified mortgages (QM loans) can be purchased by Fannie Mae or Freddie Mac, which often result in conventional mortgages that only require a 3% down payment, but non-QM loans cannot.

Bank statement loans are not regulated in the same way as loans backed by the government, such as those by the Federal Housing Administration (FHA loans), U.S. Department of Veterans Affairs (VA loans), or U.S. Department of Agriculture (USDA loans).

Not all lenders offer these types of home loans because they are less regulated and have different methods for qualifying borrowers, making them a little risky. There are also fewer consumer protections for borrowers, so it’s important to understand which loan terms to avoid, such as a balloon payment or negative amortization (which refers to when your mortgage principal increases over time rather than decreases).

Bank statement loans often charge higher interest rates than traditional mortgage loans and may require higher down payments — usually at least 10%.

A bank statement loan is ideal for borrowers who need more flexible standards to qualify for a mortgage. If you own a business or are an entrepreneur with at least one or two years’ worth of deposits from your business, you may benefit from a bank statement loan.

Similarly, self-employed individuals and independent contractors who can document 12 to 24 months of income from their work have an easier time getting a bank statement mortgage loan than a conventional or FHA loan. A bank statement loan could also be a good option if you rely on income from real estate investments.

However, bank statement loans still require borrowers to demonstrate that they are financially sound. You’ll still need a good credit score and a sufficient income history to qualify.

Because bank statement loans are more flexible than traditional mortgages, lenders can set their own standards for borrowers. Depending on the company, you can get a bank statement loan for primary residences, second homes, and investment properties.

Borrowers qualify based on their credit score, cash flow as demonstrated by bank statements, and debt-to-income ratio.

In return for these flexible qualifications, lenders typically charge a higher interest rate and require a down payment of at least 10%. In contrast, other mortgage types often accept a down payment between 0% and 3.5%, depending on which loan you choose.

While requirements vary from one lender to another, borrowers usually must supply the following:

• 12 to 24 months of bank statements

• A minimum credit score of 620 (some lenders require a minimum of 700)

• A maximum debt-to-income ratio of 50%

• A 10% down payment

• Enough cash reserves according to the lenders’ requirements

• A profit and loss statement for their business

Learn more: Can you get a home loan with no credit score? Yes — here’s how.

Bank statement mortgages offer flexibility for borrowers who may have trouble qualifying for a traditional loan, but they are not without risks.

• Ability to qualify for a mortgage with bank statements alone rather than with W-2s

• More flexibility in the amount you can borrow

• Flexible loan terms with term lengths lasting up to 40 years

• Larger minimum down payment of at least 10%

• Potential unusual loan features such as a balloon payment or negative amortization

• Higher interest rate

• Potential difficulty affording monthly mortgage payments since the income qualifications are looser

Read more: How much house can you afford? Use our home affordability calculator.

Depending on the lender’s requirements and your personal financial situation, there are other types of mortgages besides a bank statement loan. You may qualify for one of the following financing options:

• Conventional loans generally require income to be verified by tax returns, but have lower down payment requirements and interest rates than bank statement loans.

• VA loans are open to veterans and military members, have variable income requirements, and have no down payment requirements.

• FHA loans require verifiable income but have lower credit score requirements.

• USDA loans usually require tax returns, but are good for low-income borrowers buying in rural areas.

• Portfolio loans, which lenders keep within their portfolio rather than selling to investors, often have more flexible requirements — but they may charge a higher interest rate.

Some mortgage lenders provide other less common options, usually with a higher down payment requirement and/or interest rate. Here are a few more alternatives to bank statement mortgages.

• Asset depletion loans, also called asset qualifier loans, allow you to qualify for a mortgage loan with liquid assets such as retirement accounts instead of with your income.

• 1099 income loans use 1099 income forms received by freelance and contract workers. You’ll need good credit and proof of at least six months of 1099 income. (If you haven’t been a 1099 employee for six months yet, talk with a loan officer about your options.)

• DSCR loans (Debt Service Coverage Ratio loans) are used to buy investment properties you intend to rent out, and eligibility is based on a rental income analysis rather than personal income.

• Profit and Loss Statement loans, which are based on one or two years of profit and loss statements from your business. You may still need to supply bank statements from the last couple of months, though.

A traditional mortgage loan typically has a lower interest rate and down payment requirement than a bank statement loan. However, for borrowers who can’t qualify for a traditional mortgage, a bank statement loan can be a strong alternative.

The amount you can borrow depends on your mortgage lender and your personal financial situation. Generally, bank statement loans are available for a minimum of roughly $150,000 and a maximum of up to $4 million.

No, not all mortgage lenders offer bank statement loans. Of those that do, each lender has different requirements, so you may qualify with one lender but not another. Some well-known lenders with bank statement loans are CrossCountry Mortgage and Angel Oak Mortgage Solutions.

While lenders can vary their down payment requirements depending on individual circumstances, most require a down payment of at least 10% for a bank statement loan.

Laura Grace Tarpley edited this article.