Bank Statement Loans

Meeting traditional mortgage requirements is challenging enough for many borrowers. But these criteria can be even more difficult for those who don’t fit the conventional mold.

This includes self-employed individuals who, while otherwise financially sound, may not possess typical financial documents required for a mortgage application, including W-2s or pay stubs.

Bank statement loans can alleviate this issue.

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What Is a Bank Statement Loan?

A bank statement loan is a type of mortgage designed for self-employed individuals who may have difficulty getting approved for a conventional loan because of their non-traditional income reporting.

Typically, mortgage applicants use documents such as W-2s, pay stubs, or tax returns when applying for a home loan. However, these documents often don’t always accurately reflect a self-employed individual’s actual earnings. Business write-offs and deductions typically come into play that can skew income.

Instead, self-employed individuals can use personal or business bank statements to depict their average income.

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How Do Bank Statement Loans Work?

As noted, lenders will review a self-employed person’s personal or business bank statements over a period to assess income, rather than using standard tax documents. More specifically, they will use a percentage of these deposits to estimate monthly income.

  • Personal bank statements: Typically, 100% of these deposits is counted as income.
  • Business bank statements: Anywhere from 50% to 85% of deposits in business expenses may be used as income. The exact amount depends on the specific business type and model, as well as the underwriting guidelines.

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Who Are Bank Statement Loans For?

Bank statement loans – also known as a non-QM mortgage – offer a more flexible loan option for self-employed individuals who earn income in non-traditional ways.

If you’re a freelancer, gig worker, or independent contractor, you may have income that is:

  • Irregular
  • Seasonal
  • Cash income
  • Not on regular tax forms

If you fall under any one of these categories, a bank statement loan may offer an alternative way to obtain financing, even if you meet the conventional income documentation model, despite earning a strong income.

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How to Qualify for a Bank Statement Loan

Bank statement loan requirements generally include the following

Credit Score
Good credit (at least 660+, depending on the lender) is typically required.
Down Payment
Anywhere from 10% to 20% is typically acceptable, with lower down payments possibly accepted with excellent credit.
Bank Statements
Personal or business bank statements from the past 12 to 24 months are needed to demonstrate income averages.
Debt-to-Income (DTI) Ratio
Maximum DTI ratio of 45% to 50% is generally allowed, though lower ratios are more favorable.
Business Ownership
At least 2 years of self-employment is typically required.
Cash Reserves
Depending on the size of the loan, at least 3 to 12 months of mortgage payments in reserve may be a requirement.

What Documents Are Required?

As a self-employed individual, you must provide the lender with any of the following documents to verify your income and identity:

  • Personal or business bank statements from the past 12 to 24 months
  • Proof of business ownership, such as a business license
  • Government-issued photo ID
  • Statement of assets and liabilities
  • Statement of profit and loss (if applicable)
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Bank Statement Loans

Solutions for the Self-Employed

Traditional mortgage requirements can be tough—especially for self-employed borrowers. Bank statement loans offer a flexible alternative, allowing you to qualify using bank statements instead of tax returns.

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Benefits and Drawbacks of Bank Statement Loans

Borrowers with fixed-rate mortgages lack flexibility regarding interest rates and payments. As a result, when interest rates decline, they often pay more than those with adjustable-rate mortgages.

Pros

  • Flexible income verification when tax returns don’t fully reflect your income.
  • Higher loan limits compared to limits set for conventional and FHA loans.
  • Quicker approvals thanks to a more streamlined underwriting process compared to traditional mortgages.
  • No private mortgage insurance (PMI) even with down payments less than 20%.

Cons

  • Slightly higher mortgage rates compared to traditional loans due to a higher risk for the lender.
  • Larger down payments may be required to ensure that the risk is properly mitigated.
  • Limited lender availability, as not all lenders offer bank statement mortgage loans.
  • More complex underwriting due to more documentation involved.

Understanding these perks and drawbacks can help you better prepare for the application process while avoiding unpleasant surprises.

FAQs

Are bank statement loans available to first-time home buyers?

Yes, self-employed mortgage loans are available to first-time home buyers, as long as they meet the criteria for these specialized financing programs. In particular, self-employed first-time home buyers will need the past 12 to 24 months’ worth of business or personal bank statements to help lenders verify their income.

How long must I be in business to qualify for a bank statement loan?

Generally speaking, your business should have been in operation for at least 24 months to qualify for a bank statement loan.

Where can I find real-time mortgage rates online?

Digitally savvy mortgage companies, like Sammamish Mortgage, offer real-time mortgage rates online. With Sammamish Mortgage’s rate quote tool, individuals can quickly compare current rates and a detailed breakdown of estimated mortgage costs without the need to provide personal information.

How can I reduce closing costs when buying a home?

You can lower closing costs by inquiring about discounts with your lender, negotiating with the seller, and comparison shopping for more affordable services such as inspections.

Some mortgage companies, like Sammamish Mortgage, aim to help borrowers keep costs low thanks to their $1 Lender Fee structure. This allows in-house mortgage advisors to focus on educating and helping borrowers find the right mortgage program for their particular situation.

Are there mortgage lenders that serve multiple states on the West Coast?

Yes, mortgage companies like Sammamish Mortgage work with borrowers along the West Coast and the Pacific Northwest region.

How do in-house underwriting mortgage companies differ from others?

In-house underwriting mortgage companies like Sammamish Mortgage handle the mortgage approval process internally instead of outsourcing it to third parties. This approach allows for more control, faster processing, and more customized service.

Where can I get extended support from a mortgage company?

Sammamish Mortgage’s team of mortgage advisors are available 7 days a week to provide ongoing support throughout the mortgage approval process.

Glossary

Bank statement loans

Loans requiring bank statements rather than conventional financial documents

DTI

Debt-to-income ratio

Cash reserves

Money set aside to cover future mortgage payments

Write-offs

Deductible expenses that reduce taxable income

PMI

Private mortgage insurance

States we lend in

Our loan officers are ready and waiting to help you apply for your home loan.

California California Oregon Oregon Idaho Idaho Colorado Colorado Washington Washington

If you’re looking to buy a home as a self-employed individual in the Pacific Northwest region, we can help. At Sammamish Mortgage, we offer various mortgage options for those without traditional employment documentation in WA, OR, ID, CO, and CA. Visit our website to get an instant rate quote or call us today to have your mortgage questions answered!

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