Bank Statement Mortgage: What It Is & How It Works

A bank statement mortgage is a loan for home buyers who may not qualify for traditional mortgages due to their work or financial situation. Instead of relying on traditional proof of income like W-2 forms or tax returns, this type of loan depends upon a review of the borrower’s bank statements. This offers greater flexibility and can be an ideal solution for self-employed individuals, contractors, or business owners, who often have fluctuating incomes or non-cash expenses that reduce the income reflected on their tax returns. 

In this guide, we’ll review what a bank statement mortgage is and how they work so freelancers and solopreneurs may benefit from these loans, even if they’ve previously had trouble securing conventional financing.

What is a Bank Statement Mortgage

A bank statement mortgage is a loan designed for self-employed borrowers who have difficulty obtaining traditional financing due to the nature of their income. Rather than relying on pay stubs, W2 forms, and tax returns, a bank statement mortgage allows a lender to verify the borrower’s financial history through recent statements from their personal bank accounts.

Who Uses Bank Statement Mortgages

Small business owners and entrepreneurs commonly use bank statement loans because they do not have standard income records due to the nature of their businesses. These individuals often receive payments in large lump sums or via deposits from customers, which traditional lenders may consider too irregular or risky for conventional loan approval.

With a bank statement mortgage, these borrowers can establish their eligibility through past financial records. This gives borrowers more flexibility and access to funds they might not qualify for with traditional mortgages while still allowing lenders to assess their creditworthiness. 

How a Bank Statement Loan Works

With a bank statement mortgage, the lender views the prospective borrower’s recent bank statements as proof of income. This type of loan does not require the borrower to provide traditional income verification documents such as pay stubs, W2 forms, or tax returns. Instead, lenders review the borrower’s bank statements to determine their ability to repay the loan. 

If the lender can verify that the borrower has sufficient funds in their bank account and a history of consistent deposits or withdrawals, it may approve the borrower for a loan. The lender will also consider other factors, such as the length of time that the bank account has been open and whether there are any outstanding balances on the borrower’s credit report. Once the lender has reviewed all of these factors, it may offer a loan amount based on what is determined to be a reasonable amount for the borrower to repay. 

Once approved, a bank statement mortgage works much the same as conventional financing – the lender disburses the loan funds, typically as part of a real estate closing. Then, the borrower begins repaying the loan through regular monthly payments.

Bank Statement Loan Qualification Requirements

Securing a bank statement mortgage requires meeting specific qualification criteria that vary by lender. However, there are some common prerequisites that potential borrowers should typically expect. Here are a few:

• Bank statements: Lenders generally request 12 to 24 months of personal or business bank statements. This extensive financial record allows them to assess your income stability and predictability, crucial factors in determining your ability to repay the loan.
• Proof of employment or business ownership: While you may not have typical income documentation, you must prove you are employed or own your business. This helps lenders verify your income source, ensuring the funds deposited into your account are indeed from your business operations or employment.
• Credit score: Because these loans don’t rely on income verified with pay stubs or tax returns, bank statement loans typically require a good credit score. This score reflects your history of managing and repaying debts, which lenders consider when assessing your creditworthiness.
• Down payment: A significant down payment is typically necessary for a bank statement mortgage – usually 10% to 20%. This reduces the lender’s risk by decreasing the loan-to-value ratio and helps you secure equity in the property.
• Debt-to-income ratio: Lenders look at this ratio to understand how much of your income is already committed to debt payments. A lower ratio indicates a higher capability to manage and repay a new loan.
• Reserves: Having substantial reserves, or funds available after closing, provides lenders an extra layer of security. These funds can cover several months of mortgage payments if you experience a drop in income or unforeseen expenses.

What Bank Statements Do You Need to Get a Loan?

Before applying for a bank statement mortgage, it’s essential to gather all the necessary documentation. Doing so helps streamline your application and also helps to speed up the approval process. Here are the types of bank statements typically required:

• Personal bank statements: These are your regular bank statements showing your monthly income and expenses. Lenders usually require at least 12 to 24 months of statements to assess your financial stability.
• Business bank statements: If you’re self-employed or own a business, you must also provide your business bank statements. These demonstrate the health of your business and its capacity to generate consistent income.
• Savings account statements: Any additional savings accounts can also be beneficial. These provide evidence of financial reserves, showing lenders you have funds set aside in case of unexpected expenses or changes in income.
• Investment account statements: If you have any investment accounts, such as stocks, bonds, or mutual funds, these statements can further demonstrate your financial stability and assets.

The more comprehensive the picture of your financial situation, the better your chances for approval. Always check with your lender for specific requirements, as they vary.

FAQs

How Hard is it to Get a Bank Statement Loan?

Securing a bank statement loan can be more challenging than obtaining a conventional mortgage due to its unique qualification requirements. However, it can be easier to qualify for a bank statement loan in many cases than for conventional financing. Many self-employed individuals, freelancers, and business owners successfully secure bank statement loans each year.

How Much Can You Borrow on a Bank Statement Loan?

The amount you can borrow through a bank statement loan can vary significantly based on numerous factors. These include your income, credit score, the value of the property you’re trying to finance, debt-to-income ratio, and the lender you use. While some lenders may offer bank statement loans up to $2 million or even more, the amount you’re eligible for depends on your capacity to repay the loan. 

Do Bank Statement Loans Have PMI?

Private mortgage insurance (PMI) is typically not required for bank statement loans. PMI is usually associated with conventional loans where the down payment is less than 20% of the property’s purchase price, protecting the lender in case of loan default. However, with bank statement mortgages, lenders usually require a more substantial down payment, which lowers the risk and eliminates the need for PMI.