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How Bank Statement Loans Work

Written by Marc Guberti

Marc Guberti is a Certified Personal Finance Counselor who has been a finance freelance writer
for five years. He has covered personal finance, investing, banking, credit cards, business
financing, and other topics.
Marc’s work has appeared in US News & World Report, USA Today, Investor Place, and other
publications. He graduated from Fordham University with a finance degree and resides in
Scarsdale, New York.
When he’s not writing, Marc enjoys spending time with the family and watching movies with
them (mostly from the 1930s and 40s). Marc is an avid runner who aims to run over 100
marathons in his lifetime.

Updated June 23, 2024​

7 min. read​

bank statement loans

Are you shopping for a mortgage and worried you might not qualify since you’re self-employed? Fortunately, you can use your bank statement rather than your tax returns to secure a home loan. This is a perfect way to get approved for a loan without presenting traditional income documentation. Not all lenders offer bank statement mortgage loans, though. So you may want to shop around for one.

Here’s a closer look at what bank statement loans are, how they work, the pros and cons, and whether it’s right for you.

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What Is a Bank Statement Loan and How Does It Work?

A bank statement loan is a type of loan that allows you to secure a mortgage using your baA bank statement loan is a type of loan that allows you to secure a mortgage using your bank statement instead of tax returns, W-2s, or pay stubs. This is the most flexible form of financing for small business owners and self-employed individuals. It’s also an ideal loan program for anyone who doesn’t have a steady income or has more than one employer who can prove their income.

So, how do bank statement loans work? With a bank statement mortgage loan, you don’t require employer verification forms to prove whether you have enough income. Instead, you need to give the lender your personal or business bank statements.

Depending on the lender, you may also be required to present additional documentation apart from the bank statement. Some of the documentation you may require for a bank statement loan includes the following:

  • 12 to 24 months’ worth of personal bank statements and business bank statements
  • Two years’ history of self-employment
  • Business license
  • Decent credit score
  • Low debt-to-income (DTI) ratio
  • Enough cash to cover months of mortgage payments
  • Proof of any liquid assets, such as retirement accounts

Since a bank statement loan program poses a significant risk to lenders, you’ll need to make a larger down payment than you would for traditional loans. Additionally, you may end up paying higher interest rates.

Traditional Mortgage Loans vs. Bank Statement Loans

Traditional mortgage loans require you to provide various documentation to prove your income. Most mortgage lenders require tax returns, W-2s, 2-3 months’ bank statements, 30 days’ worth of pay stubs, and a good credit score. Small business owners and self-employed borrowers are often unable to meet these requirements, thus opting for more flexible options like bank statement home loans.

On the other hand, you only need months of bank statements to qualify for a bank statement loan. The underwriter typically needs to prove your ability to repay the loan based on the money going in and out of your personal accounts and business bank accounts. The months’ worth of bank statements varies depending on the lender but are generally 12 to 24 months.

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Pros of Bank Statement Loans

A bank statement loan is a popular choice for small business owners and self-employed individuals for various reasons.

Accessibility

If you’re self-employed, it’s highly likely that you write off business expenses to help minimize your tax liability. While this means you get to keep more of your hard-earned money in your pocket, it can also create a serious challenge when you apply for a home loan. Lenders consider your taxable income when applying for a traditional mortgage, and the write-offs could make it way too low to qualify for a decent home loan amount, if any. For example, if your gross annual income is $150,000, but you write off $80,000 in business expenses, your taxable income, or the figure the mortgage lender uses, is $70,000.

Bank statement loans work a bit differently, though, making homeownership more accessible for self-employed borrowers. The lender averages out your monthly earnings over 12- or 24 months based on the deposits listed on your bank statements. So, you’ll have the liberty to take as many write-offs as you’re legally allowed to without having to worry about them negatively affecting your eligibility for a home loan. Plus, you won’t have to worry about underwriters using traditional income documentation.

No Tax Returns, W-2s and Paycheck Stubs

Unlike conventional loans, require you to submit tax returns, W-2s, and pay stubs to verify your income. However, for a bank statement mortgage loan, you only need to provide several months’ worth of bank statements, which could differ depending on the lender.

Other lenders, though, may require additional documentation when evaluating your eligibility. So, you need to read the fine print of the requirements before committing yourself to a lender.

High Loan Limits

With a bank statement mortgage loan, you can qualify for a higher loan amount than you would for a traditional home loan. The amount you’ll get depends on the mortgage lender and your qualifications. If you’re looking for a huge loan amount to purchase or refinance your home, a bank statement loan might be a good option.

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You May Still Qualify Even with a Higher Loan-to-Value

The loan-to-value (LTV) ratio is a metric used to compare your mortgage loan to your property’s value. Lenders typically use the LTV ratio to assess their lending risk before approving a mortgage. Therefore, borrowers with a high LTV ratio are considered high-risk borrowers. The good news is that you can still qualify for a bank statement loan even with a high LTV ratio.

You Can Apply Even with a Low Credit Score

Your credit score is one of the most critical aspects lenders look at when assessing a borrower’s eligibility for a loan. You are probably aware that a poor credit score may limit your loan options, but that’s not the case with bank statement home loans. Some bank statement lenders are willing to work with borrowers with low credit scores.

Typically No Prepayment Penalties

Most conventional mortgage loans have prepayment penalties. This is the amount you incur when you pay off your loan ahead of schedule. However, with a bank statement loan program, you can pay off part or all of your loan as you wish without worrying about prepayment penalties.

Cons of Bank Statement Loans

As with any other loan program, bank statement loans come with drawbacks, too.

Higher Interest Rates

One of the major disadvantages of these types of loans is the higher interest rates. The reason behind the high rates is the risk bank statements lenders take to approve the loan. As a result, lenders typically charge high interest rates to offset their risk.

Larger Down Payment

Like a typical mortgage, you need to make a down payment to qualify for a bank statement loan. Some lenders may allow as little as 5%, while others require up to 25% down payment, depending on your credit score. If it falls below a certain threshold, you’ll need to make a larger down payment.

To put this into perspective, if you have a solid credit rating and the lender only requires a 5 percent down payment on a $450,000 home loan, you’ll need to bring $22,500. But if a lower credit score means you need 20 percent down, this amount jumps to $90,000 – a substantial difference of $67,500.

Even if you can afford a hefty down payment, coupling it with closing costs could make it challenging to come up with the funds you need for a bank statement mortgage. The average borrower pays between 3 percent and five percent of the home loan amount in closing costs.

Using the example above, closing costs on a $450,000 mortgage will likely be between $13,500 and $22,500. So, with a down payment of 20 percent, or $67,500, expect to come out of pocket anywhere from $81,000 to $90,000.

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Offered Only by a Few Lenders

Not all lenders offer bank statement loans. While you may get this loan program in traditional banks and credit unions, a few financial institutions and online lenders do offer it.

Who Qualifies for Bank Statement Loans?

Applicants need to have at least two years of business experience and self-employment income. While those parameters are the benchmarks, some lenders have more generous requirements, while others may require additional experience.

How Bank Statement Loans Impact Self-Employed Individuals

Self-employed individuals may have a more difficult time getting traditional financing. Bank statement loans are viable alternatives, but it’s good to know how they’ll impact your finances.

Unique Challenges and Benefits for the Self-Employed

These loans are more expensive due to their high interest rates and also require higher down payments. However, you can get approved even if you have bad credit or a high LTV ratio and don’t want to show any of your tax returns.

The latter advantage is important for self-employed workers. Many business owners use tax deductions to save money on taxes. While this is a normal strategy, it also reduces your taxable income. Most lenders use your taxable income to assess if you can afford the monthly loan payments, so the bank statement loan is a valuable resource if you can make the higher down payment.

Business vs. Personal Bank Statement Loans

Business and personal bank statement loans follow the same approach, but lenders look at statements from different accounts. For a business bank statement loan, lenders will review the past 12-24 months of your business bank statements. To get approved for a personal bank statement loan, the lender must look over your personal bank statements within the past 12-24 months.

Is It Hard to Get a Bank Statement Loan?

Bank statement loans are hard to find because only a few lenders offer them. For this reason, lenders that provide this type of mortgage loan require larger down payments and often charge high interest rates.

There are reputable options out there, though, and you should evaluate them by:

  • Confirming they are licensed to do business in the state, you’re looking to purchase a home
  • Ensuring they offer competitive terms and interest rates compared to other lenders in the industry
  • Determining if their eligibility criteria work for your financial situation
  • Analyzing reviews from past and current clients to get a feel for how they do business and if the level of customer service is exceptional or just average
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Is a Bank Statement Loan Right for You?

A bank statement loan is ideal for you if you do not have a steady income or cannot get proof of income from an employer. For example, the following people or independent professionals can use a bank statement loan:

  • Self-employed individuals
  • Consultants
  • Contract workers
  • Freelancers
  • Small business owners
  • Independent contractors
  • Doctors
  • Lawyers
  • Real estate investors and real estate agents

Where Can You Get a Bank Statement Loan?

You can get a bank statement loan from Angel Oak Mortgage Solutions, an online lender that offers a wide variety of mortgage loan programs.

Apart from bank statement loans, you can also get traditional mortgage loans like USDA loans, FHA loans, and veteran home loans. In addition, various non-QM mortgage products are also available, including asset qualifier loans, investor cash flow loans, Jumbo, foreign national programs, and portfolio select home loans.

Here’s what you need to get a bank statement loan From Angel Oak Mortgage Solutions:

  • Two years of self-employment
  • 12 to 24 months of personal or business bank statements
  • 1099 form for individuals in the gig economy
  • Additional documentation will be required to prove the borrower’s income
  • You plan to use the funds to purchase or refinance your primary residence, second home, or investment properties

Visit Angel Oak Mortgage Solutions and complete a simple online application form to find a loan officer from the team of experts, get a quote for a bank statement loan, or learn more about what its bank statement program or other loans offer.

FAQs About Bank Statement Loans

How much income do you need for a bank statement loan?

The amount of income you need depends on the monthly loan payment. You can get a bank statement loan with a 43% DTI ratio. A higher down payment and a lower loan amount will increase your chances of getting approved.

What credit score do you need for a bank statement mortgage?

You can typically get a bank statement mortgage with a 620 credit score. However, a higher credit score will result in more favorable rates and terms.

How much can you borrow with a bank statement mortgage?

The maximum loan amount depends on the lender, but it’s possible to find lenders who will let you borrow up to $5 million with one of these loans.

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