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Everything Self-Employed Borrowers Should Know About Bank Statement Programs

For most borrowers, proving income is the easiest part of the process. Submit a couple of pay stubs, perhaps ask your employer for a proof-of-income letter, and you’re all set.

But what if you’re self-employed?

Whether you’re a freelancer or business owner, establishing proof of steady income is more complicated than it is for W-2 employees. Clients pay you on varying schedules, business can ebb and flow, and your earnings may vary from month to month. For anyone with these types of non-traditional income, a bank statement loan can be a great choice for purchasing a home.

We’ll cover what bank statement loans are, how they work, and whether they're your best option for getting a mortgage.

What are bank statement loans?

Bank statement loans are a mortgage that uses a history of deposits to your bank account, rather than pay stubs or tax documents, to prove your income. They’re a type of non-qualified mortgage, which means they don’t fit the traditional underwriting guidelines that use W-2 income as criteria. However, the term is a bit misleading, as you’ll still need to meet several requirements to qualify.

Since they’re non-qualified, not all mortgage lenders offer bank statement loans. Banks and credit unions frequently shy away from them, but a dedicated mortgage broker can usually help with the process. 

Requirements vary by lender, but you’ll generally need the following:

  • One or two years of bank statements
  • Two years of self-employment history
  • Minimum FICO score of 660
  • Enough liquid assets to cover several monthly payments
  • A letter from an accountant certifying your business expenses and tax status

How do bank statement loans work?

Once you submit your bank statements, the lender will determine your qualifying net income by your monthly average for deposits, and then apply an expense factor. The expense factor is typically 50%, but it can vary by lender, your industry, and whether you’re using business or personal bank statements.

Using that calculated income, the lender will determine what type of loan you qualify for. Since it’s a non-qualified mortgage that carries more risk, the terms are usually more restrictive:

 

  • You’ll need a 20% down payment, or 10% with private mortgage insurance (PMI)
  • Interest rates are higher than conventional loans
  • Lenders will typically offer fewer options and less flexibility in loan duration
  • You can use them for new purchases and refinancing, but cash-out options are frequently limited

The approval process can also take longer than standard loans. It usually takes three or four weeks to complete the process but can take up to two months if your finances are especially complicated.

Who’s a good candidate for this type of mortgage?

While anyone who’s self-employed is a candidate for a bank statement loan, there are some key qualifying criteria that fall into two categories:

  • Self-employment - You’ll need to prove that you’re actually self-employed. There are a variety of ways to do this, but it typically involves submitting copies of professional licenses and supporting documents. Supporting documents can be a range of things such as an online portfolio or company website, invoices and bills, or even a Yelp page.
  • Income - Requirements vary by lender, but being able to provide statements from a business bank account will make the process easier. Some lenders will accept personal bank statements for sole proprietors and freelancers, but it can complicate the process.

Bank statement loans are especially valuable if you have a lot of write-offs or deductions. In that situation, your tax documents will reflect lower income, but bank statements will show that you’re bringing in plenty of money and enable you to qualify for a bigger loan.

However, there are situations where the structure of your self-employment income can make a bank statement loan more complicated. For example, if you own real estate and have the revenue flowing to your personal bank account as Schedule E income, you’re going to need to use tax returns rather than bank statements. Similarly, if you’re self-employed but don’t have a corporation or LLC, it will be difficult to use the dividends and distributions on your personal bank statement as qualifying income.

Other options for self-employed borrowers

Bank statement loans aren’t the only avenue for self-employed people seeking a mortgage. You might qualify for other types of loans by using other ways of verifying your income — such as tax returns — or based on factors like credit score, military service, and the property you’re planning to purchase.

There are a few other common options for self-employed borrowers:

  • Conventional loans - The underwriting guidelines that Fannie Mae and Freddie Mac use for conventional mortgages have several options for self-employed income. If you can use one of them and have good credit, conventional loans will often have better terms than a bank statement loan.
  • FHA loans - Income regulations for Federal Housing Authority (FHA) mortgages are similar to conventional loans, but the credit and debt-to-income guidelines are a bit looser. However, you can only use an FHA loan on a home that will be a primary residence, so they’re not an option for investment property.
  • VA loans - If you served in the military, VA loans can be a great option thanks to low rates and fewer fees. Terms vary by lender, but in many cases, you can obtain a loan without a down payment or great credit, and you won’t need PMI.

Need help with a bank statement mortgage?

Qualifying for a mortgage as a self-employed borrower can be complicated. Bank statement loans are a great choice, but you'll have to provide more documentation and details.

If you'd like to get a jump start on the process, you can fill in your information on this page to see if you qualify for a bank statement loan. 

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