If you’re self-employed you might find it challenging to qualify for a standard mortgage.
Fortunately, there is an option for homebuyers who have the money to purchase a property but not the steady income history to prove it: a bank statement loan.
What's in this Article?
Bank statement mortgage loans enable qualified borrowers to get home financing without having to prove their income using traditional documentation methods.
“Bank statement loans allow you to get a mortgage without providing paycheck proof or showing net income on tax returns,” explains Levon Galstyan, a certified public accountant in Glendale, California. “The terms ‘self-employed mortgages,’ ‘alternative documentation loans,’ and ‘alt doc loans’ are also used to describe this type of financing.”
Instead of proving your income, “your lender will look at your bank statements and financial history to assess your risk level and ability to repay the loan,” says Jake Hill, CEO of Austin, Texas-headquartered DebtHammer.
Generally speaking, someone who works for themselves or owns their own business might want to get a bank statement loan.
According to Galstyan, this can include:
- Small business owners
- Real estate agents
Self-employed borrowers must show two years of tax returns to qualify for a conventional or government-backed mortgage program. However, lenders may consider exceptions for borrower that have been self-employed for one year and have several years of 1099 or W2 background in the same industry.
Other borrowers who might benefit from a bank statement loan include those who can’t provide proof of consistent employment or who have irregular income.
Sometimes a self-employed person might have more income – and more buying power – than their tax returns indicate.
“Because income and tax returns are often adjusted for deductions and business write-offs, you may be unable to get a conventional mortgage or FHA loan if you work in these fields. Your tax returns and financial documentation may not accurately reflect your earnings,” Galstyan says. “This is where your bank statements can help you prove your actual income.”
You’ll need to meet specific requirements to qualify for a bank statement loan, although guidelines vary from lender to lender. According to the experts featured in this article, be prepared to provide:
- 12 to 24 months of bank statements
- At least 24 months of self-employment history proving that you’ve been in business a minimum of two years, such as a CPA letter
- There can be exceptions for strong borrowers that have been self-employed for at least 12 months and have two or more years of work history in the same industry before becoming self-employed
- Sufficient cash or liquid assets to cover multiple months’ worth of mortgage payments
- A letter from your accountant, or the person who helps you with your taxes, that validates your business expenses and verifies that you file taxes as an independent contractor
- Records of other financial accounts, such as a 401(k) or different investment account
- Proof of your business license, if you have one
What’s more, you’ll also need:
- Qualifying credit score. Your lender may require a higher score than on conventional or government-backed loans for a bank statement mortgage loan
- A minimum of 24 months since any foreclosure, bankruptcy, discharge, short sale, or deed-in-lieu of foreclosure event (although some lenders require 4 or more years)
- A down payment of at least 10% to 20%
As you would expect with any loan, a bank statement loan has advantages and disadvantages.
“The loan limit for a bank statement loan may be higher than with other loans,” says Robert Bailey, servicing manager at Payday Loans Help. “And this financial option may be used for any variety of housing investments, including for primary residences, investment properties, and second homes. By contrast, an FHA loan cannot be used to finance a rental property, vacation home, or investment property.”
Since lenders can set their own guidelines for bank statement loans, they may be able to be more flexible with credit score requirements and other borrower guidelines.
Although it’s not uncommon for lenders to want to see a credit score of 620 or higher, some may be willing to approve borrowers with lower scores.
You may be charged a higher interest rate on a bank statement mortgage than you would for other types of home loans, depending on your lender’s policy.
Lenders sometimes require more money down on a bank statement loan, as much as 10-20%. This is significantly more than conventional loans, which require 3%, and government loans that have 0%-3.5% down payment requirements.
“Bank statement loans may not be offered by some lenders, so you may need to shop around to find a participating lender,” says Galstyan. “Plus, they are not regulated in the same way that other mortgage programs are. So each lender establishes its own set of criteria for underwriting standards for approving these loans.”
Before signing on the dotted line, it’s crucial to do your homework.
“Look closely at the annual percentage rate and the total loan cost for the loan length,” Galstyan advises. “And scrutinize the closing costs involved carefully.”
Ask yourself the following questions before committing to a bank statement loan:
- How much will I have to pay in loan fees? Are any of these fees refundable?
- What is my estimated cash needed to close, including the down payment?
- What is the total principal amount you will have paid after the first five years?
- What are the lender’s penalties for late payments?
- What are the repayment deadlines?
- How certain am I that my future income will be sufficient to make my mortgage payments?
“Ask questions to fully comprehend what is involved and required of you. Knowing and understanding the loan specifications is critical to avoid future issues,” adds Galstyan.
Bailey agrees that the most important thing to note about bank statement loans is the loan’s terms and conditions.
“You must grasp them fully before engaging,” he recommends. “Make certain there are no hidden fees or costs buried in the legal and financial jargon.”
Lastly, consider if any loan alternatives are a better fit for your needs.
“If you are self-employed, you may still be eligible for a conventional mortgage loan or FHA mortgage. Most lenders check your income by averaging the last two years of tax returns. If you’ve been self-employed for at least two years and your income has remained stable or increased during that time, you still might be able to get a conventional loan at a lower interest rate than you’d pay for a bank statement loan,” Galstyan points out.
Bank statement loan FAQs
Yes. Bank statement mortgage loans typically only require one to two years of bank statements to qualify, unlike other types of mortgage loans that obligate you to provide tax returns, W-2 forms, pay stubs, and/or employment verification.
According to financial expert Levon Galstyan, you need a minimum credit score of 500 to 620 to qualify for most bank statement loans, although every lender sets its own minimum credit requirements.
To be eligible for a bank statement loan for self-employed or other types of borrowers, you commonly need:
– 12 to 24 months of bank statements
– At least 24 months of self-employment history proving that you’ve been in business a minimum of two years
– Sufficient cash or liquid assets to cover multiple months’ worth of mortgage payments
– A letter from your accountant or tax preparer validating your business expenses and your status as an independent contractor
– Records of other financial accounts, such as a 401(k) or another investment account
– Proof of your business license, if you have one
– A minimum of 24 months since any foreclosure, bankruptcy, discharge, short sale, or deed-in-lieu of foreclosure even
– A down payment of at least 10% to 20%.
A bank statement loan can be a great option if you have the income to afford a home, but not the documentation to prove it.
Still, there are pros and cons to every loan option, and you could end up paying more if you go the bank statement mortgage route.
It’s best to consult with a lender who can explain all of your options and help you strategize an affordable homeownership plan.
- Bank statement loans are an alternative to conventional and government-backed loans
- You can qualify using bank statements and proof of other assets, rather than pay stubs and proof of W2 employment
- You may have to make a higher down payment and may pay a higher interest rate with a bank statement loan