A bank statement loan makes it possible to get a mortgage using bank statements for mortgage preapproval, instead of a Form W-2 and a tax return. Bank statement loans can be useful for self-employed individuals, freelancers, entrepreneurs, who might find it challenging to get a conventional mortgage loan.
Bank statement loans are considered non-qualified mortgages (often abbreviated to non-QM), and therefore aren’t guaranteed by Fannie Mae and Freddie Mac. Such loans offer fewer protections for both lenders and borrowers, and typically have higher interest rates and larger down payment requirements than conventional loans.
How do bank statement loans work?
In order to get a bank statement loan, you will first need to find a lender that’s offering this type of loan. When applying, you will be asked to provide your bank statements (including your personal and business accounts) for a period of up to two years. This will allow the lender to determine your net income and decide whether you’re suitable for the loan.
The lender will also look at other factors such as your credit score, ability to pay the required down payment, debt-to-income ratio and more.
The benefits and disadvantages of bank statement loans
Bank statement loans provide the opportunity to finance the purchase of real estate even to those who don’t receive a Form W-2 from an employer or have an inconsistent income. However, they also have some disadvantages which stems from the fact that they are considered riskier than conventional mortgages.
Let’s quickly highlight some of the biggest benefits and drawbacks of bank statement loans:
Pros:
Provide more flexibility when it comes to income verification, which makes them more suitable for self-employed individuals, entrepreneurs and others who might not receive income from traditional sources.
Bank statement loans can provide the possibility to purchase a second home or an investment property.
Depending on the size of the down payment, the cost of private mortgage insurance can be avoided.
Depending on the situation, a bank statement loan can allow the borrower to access a larger loan than they could with a conventional mortgage.
Cons:
Higher interest rates, higher down payment requirements and fewer consumer protections compared to traditional mortgage loans.
Offered by a relatively small number of lenders, which can make it difficult to find a good offer.
If you’re considering taking out a loan, we provide a helpful NPER calculator tool which can help you calculate how long it will take off to pay it off.
Bank statement loan vs. conventional mortgage
Now that we understand the basics of bank statement loans, let’s see how they stack up against conventional mortgages. While both are used to finance purchases of primary residences, vacation homes or investment properties, there’s some important differences between the two.
Bank statement loan Conventional mortgage Type of borrower Self-employed individuals, business owners, freelancers, retirees Employees who receive a Form W-2 Income verification Bank statements (12 - 24 months) Form W-2 and tax returns Interest rate Higher Lower Minimum down payment 10% 3% - 5% Minimum credit score 620 620
Bank statement loan requirements
Here are the most common requirements you’ll have to meet when applying for a bank statement loan.
Credit score
Most lenders who offer bank statement loans will have a minimum credit score requirement for applicants. When it comes to bank statement loans, the credit score requirement is typically higher compared to conventional loans, and typically starts at around 620 - 640.
Consistent income
In order to get a bank statement loan, you will most likely have to demonstrate that you have a history of stable income. Typically, lenders will analyze a period of between 12 and 24 months and look for consistent bank account deposits throughout the period.
Down payment
Bank statement loans typically have a larger down payment requirement than conventional loans, with minimums usually starting around 10%. The down payment requirement could even be 20% or above, depending on the lender.
Debt-to-Income (DTI) ratio
Lenders who offer bank statement loans will typically evaluate your debt-to-income ratio – ideally, your DTI ratio should be as low as possible to have a higher chance of getting the loan approved.
Documentation
In addition to your bank statements, which will be the primary for of documentation for verifying your income when applying for a bank statement loan, you will likely also be required to provide additional documentation such as business licenses or tax filings.
Cash reserves and proof of assets
Depending on the lender, you might have to demonstrate that you have additional liquid cash reserves. You might also be asked to provide proof that you own other assets such as stocks, retirement accounts or other kinds of investments.
FAQs
Now, let’s quickly address some of the most common questions users have on the topic of bank statement loans.
How many months of bank statements are required to apply for a bank statement loan?
Typically, borrowers have to provide between 12 and 24 months of bank statements to apply for a bank statement loan.
How to get a bank statement loan?
Many banks and other lending institutions don’t offer bank statement loans due to their higher risk. However, you should be able to find a lender that offers bank statement loans if you consult with a mortgage broker.
When evaluating brokers, make sure they are licensed to operate in your state and have experience with bank statement loans. After selecting the appropriate broker, reach out to them to explore lenders that can help you obtain a bank statement loan.
After finding a suitable lender, the next step is to get preapproved so you know how much you’d be able to borrow and what the loan terms would look like.
It’s recommended that you go through this process with multiple lender so you can compare loan offers. Once you decide on the best offer available to you, you can formally apply for the loan.
The bottom line
Although bank statement loans are certainly not for everyone, they provide some welcome flexibility for those who are self-employed or run their own business. However, it’s important to understand that they typically come with higher interest and higher down payment requirements because they are considered more risky than traditional mortgage loans.
If you’re interested in learning more about the topic of loans, make sure to check out our article explaining what increases your total loan balance.