What Is a Bank Statement Loan?

A bank statement loan is a flexible financing option designed primarily for individuals with non-traditional income sources who might struggle to secure a conventional mortgage.  Unlike conventional loans, which typically require W-2 forms and pay stubs, bank statement loans rely on you guessed it bank statements to verify your income. This loan is helpful for those whose income streams may be substantial but irregular, making it hard to prove their financial stability through traditional means. Self employed borrowers have embraced the bank statemen loan and the interest rates are better than no doc mortgages and stated income loans as well.

Bank statement loans have replaced stated income loans and help self-employed borrowers and those who do not receive a W-2 to qualify for a mortgage using bank statements instead of pay stubs, w2’s, 1099’s or 1040 tax returns. These bank statement loans are similar to no income verification loans offer greater flexibility compared to conventional loans regarding income verification, term length, loan amount, and minimum debt-to-income (DTI) ratio. However, they may come with slightly higher mortgage rates and increased down payment requirements.

How Bank Statement Loans Streamline the Mortgage Process

Let’s consider Alex, a freelance photographer.

Alex’s income fluctuates: some months he lands big projects and other months are slower.

Most traditional lenders shy away because his tax returns are complex and show lots of business deductions, lowering his taxable income.

He decides to apply for a bank statement loan and gathers his bank statements from the past two years.

These show consistent monthly deposits averaging $5,000, even though his annual tax returns might only report $45,000 after deductions.

Based on his bank statements, the lender calculates his monthly income as roughly $5,000, making him eligible for a larger loan than his tax returns would have secured.

How Do Bank Statement Loans Work?

Instead of the usual tax returns or salary slips, lenders look at deposits in your bank accounts over a certain period—typically 12 to 24 months—to determine your eligibility. They calculate your income based on these deposits, considering the total amount and the consistency of the money coming in. Doing it provides a more comprehensive picture of your financial health, focusing on the actual cash flow rather than just formal paychecks.

With a bank statement mortgage, you can use 1 to 2 years’ worth of bank statements to verify your income. The lender will review these statements and your deposit history to determine if you earn enough to qualify for a home loan.

Key Features of Bank Statement Loans

• Flexibility in Income Verification: These loans accommodate self employed borrowers and varied income patterns as they are tailored for non-W-traditional earners,
• Higher Approval Odds for Entrepreneurs: Bank statement loans are ideal for those who run their businesses or freelance.
• Potentially Larger Loan Amounts: A bank statement mortgage loan is based on overall cash flow, which can sometimes reveal a higher income than taxable documents might show.

What Are Bank Statement Loan Requirements?

Need to know the bank statement loan requirements for a mortgage? We’ve got you covered with all the must-know details to get you started.

The bank statement mortgage program is great for people with unconventional income streams—like freelancers, small business owners, or anyone whose paycheck doesn’t look like the traditional nine-to-five gig.

However, dealing with bank statement loan requirements can often feel like decoding a secret language—it’s confusing and a bit overwhelming.  If you’re eyeing a non-traditional loan but are scratching your head over the endless financial terms and conditions, you’re definitely not alone.

That’s why we’ve created this blog to strip away the complexity and give you a clear, simple breakdown of what you need for a bank statement mortgage. 

Here, we’ll break down the essentials: What exactly are lenders looking for in your bank statements? How can you prepare your documentation to make the best impression? 

And what pro tips can help boost your chances of approval? Our mission is simple—to arm you with the information you need so you can approach your loan application with confidence and clarity. 

So, get ready to turn what seems like a financial challenge into a step toward your goals.

Now that we’ve gotten a good look at what the bank statement loan program offers, let’s talk about what you need to get one. Up next, we’ll cover the kinds of documents you should have ready, what lenders are looking for in your application, and any other details that might come into play. Let’s get everything in order so you’re set to go when you apply:

• Credit Score

When applying for a bank statement loan, one of the first factors lenders look at is your credit score. Typically, the minimum credit score required to qualify is around 620. There are Non QM lenders that will offer bank statement mortgages to self employed borrowers with credit scores under 600. There are hard money lenders that still offer no doc loans to self employed borrowers but the interest rates and closing costs are much higher.

However, it’s worth noting that a higher credit score doesn’t just open the door to eligibility; it can also secure you better loan terms, like lower interest rates and more favorable repayment conditions. 

Essentially, the better your credit score, the more trustworthy you appear to lenders, and the more likely they are to offer you a sweet deal.

 

Why a Good Credit Score Matters

For lenders, a good credit score is a quick snapshot of your risk level and a crucial factor in determining the terms of your loan. That’s why aiming for a higher credit score can help when securing financing, especially for something as major as a bank statement mortgage loans.

Tips to Boost Your Credit Score

Here a few tips to improve your credit score so you can secure a self-employed mortgage:

• Pay Your Bills on Time

Payment history is a huge component of your credit score, making up about 35% of the total. Even a single late payment can ding your score, so setting reminders or automating your payments can be a lifesaver.

• Reduce Your Credit Utilization Ratio

Your credit utilization ratio—how much credit you’re using compared to your limits—should ideally be below 30%. If you can get it even lower, that’s better as it shows lenders that you aren’t overly reliant on credit, which paints a picture of financial responsibility.

• Regularly Check Your Credit Reports

Errors on your credit reports can drag down your score unnecessarily. So, you should make it a habit to check your credit reports from the three major credit bureaus—Experian, Equifax, and TransUnion—at least once a year. If you spot any inaccuracies, dispute them promptly to get them corrected.

• Avoid Opening New Credit Lines Unnecessarily

While it might be tempting to open new credit accounts, doing so can lower your average account age, which can negatively affect your score. Plus, each new application typically involves a hard inquiry, which can also reduce your score. Stick to necessary credit accounts and manage them wisely.

• Income Verification

When you apply for bank statement loans, lenders want to see a more extended history of your financial flow. Specifically, you’ll need to provide 12 to 24 months of personal or business bank statements. The documentation helps lenders gauge your income stability and consistency over a significant period—key factors in assessing your loan eligibility.

For self-employed individuals, freelancers, or small business owners, bank statements are a ledger of the financial life. They help lenders verify that you have a steady income stream, necessary to manage the loan repayments.

Detailing the Proof of Self-Employment 

Here’s how you can prove your income for a bank statement mortgage loan:

Two-Year Minimum: The Standard

A critical component of the income verification process for a bank statement loan is proving that you’ve been self-employed for at least two years. It is crucial because it shows lenders a track record of sustained income which suggests that your business is stable and likely to continue generating income.

Documenting Your Self-Employment

To meet this requirement, you can provide various documents, such as business licenses, tax returns, or even letters from your CPA affirming your business status. Each lender may have slightly different requirements, but the goal is always the same: to establish that your self-employment is legitimate and enduring.

Key Takeaways for Your Application

1. Gather Comprehensive Financial Documentation: Ensure your bank statements are complete and accurately reflect your income.
2. Prove the Longevity of Your Self-Employment: Be prepared with appropriate documents to show you’ve been self-employed for at least two years.
3. Consult with a Financial Advisor: If you’re unsure about the documentation required, a quick consultation with a financial advisor or a loan officer can provide clarity.

3. Debt-to-Income Ratio (DTI)

The debt-to-income ratio, commonly referred to as DTI, measures the percentage of your gross monthly income that goes towards paying your monthly debt obligations. Essentially, it gives lenders a snapshot of your financial health: how much you owe versus how much you earn.

For most bank statement loans, the preferred DTI is no higher than 40-50%. This range suggests that while you have existing debts, you still have enough income to manage new loan payments without financial strain.

Why Keeping Your DTI Low Matters

A lower DTI is beneficial because it indicates to lenders that you are not overly burdened by debt and are likely to manage additional loan obligations smoothly. It can mean more favorable loan terms and interest rates, as it reduces the risk from the lender’s perspective.

Improving Your DTI

Here are some ways you can follow to improve your DTI:

• Reducing Your Debts

Reducing your monthly debt obligations could mean paying off smaller debts completely or consolidating multiple debts into a single, lower-interest payment. Doing so not only improves your DTI but also can help enhance your overall financial landscape.

• Increasing Your Income

While easier said than done, increasing your income can significantly lower your DTI. Whether it’s taking on additional freelance work, securing a higher-paying job, or starting a side business, any increase in monthly income will improve your DTI by making your debts a smaller percentage of your income.

• Avoid Taking on New Debt

When preparing to apply for a bank statement loan, it’s wise to put off any large purchases that might require taking on new debt, such as buying a car or opening a new credit card. New debts will increase your DTI and could negatively impact your loan application.

4. Down Payment

Most credible mortgage lenders ask for a down payment ranging from 10% to 25% of the home’s purchase price when you apply for bank statement loans. 

The down payment serves as your stake in the property and represents your initial equity in your new home. For lenders, it’s a measure of your commitment and reduces their risk in lending to you. A larger down payment can also result in more favorable loan terms, such as lower interest rates or reduced mortgage insurance costs, which can save you money over the life of your loan.

The relationship between your credit score and your down payment is direct: the better your credit score, the less you may need to put down. Lenders view a higher credit score as a sign of a financially responsible borrower. Consequently, they are often willing to accept a smaller down payment because they perceive less risk in the loan.

Let’s take a freelance graphic designer, as an example. He has a credit score of 680 and wants to buy a house priced at $300,000. Based on his credit score and the lender’s requirements, he’s asked to make a 20% down payment, which amounts to $60,000. 

Realizing this, the applicant works to improve his credit score over the next year while saving aggressively. By the time he applies for the loan, his improved credit score qualifies him for a 15% down payment instead, reducing his required upfront payment to $45,000—saving him $15,000.

Tips For Managing Your Down Payment

Follow these tips to manage your down payment better:

1. Save Strategically: Start saving for your down payment as early as possible. Consider setting up a dedicated savings account specifically for this purpose and automate transfers to steadily build your funds.
2. Explore Assistance Programs: Many states and local governments offer programs to help first-time homebuyers with their down payments. These programs can provide grants or low-interest loans to reduce the financial burden.
3. Adjust Your Down Payment Based on Your Credit: If you have a lower credit score, aim to save a higher down payment to secure better loan terms. If your credit score is high, you might strategize using your good credit to negotiate lower upfront costs.

5. Cash Reserves

When applying for bank statement loans, demonstrating that you have cash reserves—essentially savings that can cover several months of mortgage payments—is important. 

Lenders generally look for reserves that cover up to 12 months’ worth of payments for larger loan amounts. Notably, you can use a mortgage calculator beforehand to know if you have enough cash reserves to cover for a few months and then apply for a bank statement mortgage loan.

This requirement is a safety net, giving lenders confidence that you can continue to make payments even if your income hits an unexpected lull.

Having good cash reserves not only strengthens your loan application but can also be a deciding factor in the approval process. It shows lenders that you have sound financial management skills and a buffer against potential financial shocks, making you a lower-risk borrower.

6. Other Financial Considerations

Your liquid assets can include funds in savings accounts, investments, and other easily accessible financial resources. Lenders view these assets as a further indication of your financial stability and your ability to cover loan payments during times when your primary income might fluctuate.

Having a healthy cushion of liquid assets shows lenders that you have more than just enough to get by; you have the means to manage unexpected expenses or downturns in income without jeopardizing your loan payments. 

For self-employed applicants, lenders will likely conduct a detailed review of your business expenses and the consistency of your income as shown through your bank statements. This scrutiny helps them understand the ebb and flow of your business, ensuring that your income is stable enough to support ongoing mortgage obligations.

Simplify Your Bank Statement Loan Acquisition with BD Nationwide Mortgage

Getting through the bank statement loan requirements can be straightforward if you know what to expect. If you’ve got your paperwork in order and understand what lenders are looking for, your chances to secure a bank statement mortgage loan are bright. 

It’s always a good idea to talk directly with lenders to get the specifics because they can vary a bit. This way, you’re all set for a smooth application process. 

If you’re considering a bank statement loan, shake hands with BD Nationwide Mortgage. We’ll make sure you have all your ducks in a row, so when it comes time to apply for bank statement loans, everything rolls out smoothly.

FAQs

How do seasonal income fluctuations affect my bank statement loan application?

Seasonal income fluctuations are common for businesses in industries like retail or agriculture. When applying for a bank statement loan, lenders will typically look at a longer history—usually 24 months—to better understand your annual income cycle. This approach helps them assess your ability to repay the loan across different seasons, not just during peak periods.

Can I qualify for a bank statement loan if I have a new business that’s less than two years old?

Generally, bank statement loans require proof of self-employment for at least two years to demonstrate income stability and business viability. However, if your business is newer, you might still be considered if you have a strong financial background, significant cash reserves, or a co-signer with a robust financial standing.

What impact does my existing debt have on qualifying for a bank statement loan?

Existing debt can affect your debt-to-income (DTI) ratio, which is a critical factor in the bank statement loan approval process. If your DTI ratio is higher than the preferred maximum (usually around 40-50%), you might need to pay down some debts before applying or consider a larger down payment to balance the risk from the lender’s perspective.

Takeaways on Bank Statement Loans in 2024

Not every mortgage lender offers bank statement loans, so finding an experienced bank statement loan lender is crucial for securing the best rates and terms. BD Nationwide will help you get matched with Non QM and private money lenders that specialize in banks statement mortgage loans with competitive interest rates and terms.