Bank Statement Loans: Qualify With Deposits Instead of Tax Returns

Self-employed borrowers often minimize taxable income through legitimate business deductions. While this reduces their tax burden, it can also make it difficult to qualify for a conventional mortgage that relies on adjusted gross income from tax returns.

Bank statement loans solve this problem by using actual bank deposits as proof of income. The lender reviews 12 to 24 months of personal or business bank statements and calculates average monthly income based on deposits.

For personal bank statements, most lenders use 100% of deposits as qualifying income. For business bank statements, lenders apply an expense factor (typically 50% to 80% of deposits are counted as income) to account for business expenses.

Bank statement loan requirements are less rigid than conventional loans but include:

• Self-employment: You must be self-employed for at least 2 years. Lenders verify this through a business license, CPA letter, or LLC/corporation documents.
• Credit score: Most lenders require 620 minimum, with better rates at 680 and above.
• Down payment: Typically 10% to 20%. Some programs offer as low as 10% down for purchase transactions.
• Reserves: Lenders may require 3 to 12 months of mortgage payments in liquid assets.
• Bank statements: 12 or 24 months of consecutive statements. The longer statement period may qualify you for better pricing.

Unlike conventional loans, bank statement loans do not require income tax returns, W-2 forms, or pay stubs.

You can qualify using either personal or business bank statements, and the choice affects how income is calculated:

Personal bank statements are simpler. The lender adds up all deposits over the statement period and divides by the number of months to determine average monthly income. Transfers between accounts may need to be sourced and excluded to avoid double counting.

Business bank statements require an expense factor. The lender applies a percentage, typically 50% to 80%, to determine the portion of deposits that represents take-home income. A CPA letter confirming the business expense ratio can help maximize your qualifying income.

In some cases, you can combine personal and business statements to present the strongest picture of your income. Discuss options with your lender to determine the best approach.

Bank statement loans carry higher interest rates than conventional mortgages, typically 1% to 2% higher. This premium reflects the alternative documentation approach and the non-QM classification.

Other cost considerations include:

• Closing costs are similar to conventional loans, ranging from 2% to 5% of the loan amount.
• Prepayment penalties are common, typically for the first 2 to 3 years. Review these terms before committing.
• Loan amounts range from $100,000 to $3,000,000 or more, depending on the lender.

Despite the higher rate, bank statement loans provide access to homeownership or investment property financing that would otherwise be unavailable through traditional channels.