Bank Statement Loans: How Self-Employed Borrowers Qualify

Bank Statement Loans: How Self-Employed Borrowers Qualify

Your Tax Return and Your Income Are Two Different Numbers

Many businesses strategically use expenses to reduce their taxable income. That doesn't mean the business isn't profitable, or that it doesn't have substantial cash flow. But the number at the bottom of the tax return is the one a conventional underwriter uses to decide how much you earn. If that describes your situation, a bank statement loan could be right for you.

A bank statement loan takes a different starting point. Instead of the net income on your returns, the lender looks at the money that actually moved through your accounts over 12 or 24 months, applies an expense factor, and uses what is left as your qualifying income.

It is a non-QM loan, which means it sits outside the standard agency guidelines. That comes with trade-offs, covered below.

How the Income Calculation Works

Here is the mechanic, using a made-up example:

That $15,000 then goes into a normal debt-to-income (DTI) calculation, which compares the new payment plus your other monthly debts to your income. Many programs cap DTI around 50%.

The expense factor is the part to understand. The standard assumption is that roughly half of your deposits go to running the business. If your real expenses are lower, and you can document it, some programs will use a smaller factor. Depending on the program, that documentation is a letter from a CPA, enrolled agent, or licensed tax preparer, or a profit-and-loss statement prepared by one. It can raise your qualifying income meaningfully, so it is worth asking your accountant whether they will provide it.

12 months or 24? Twelve months works when your recent deposits are strong. Twenty-four months averages your deposits over a longer period, so inconsistencies during that time, like a slow season or an unusually strong recent stretch, carry less weight.

Which Statements Count

Two kinds of accounts can qualify, depending on the program:

• Business statements. The usual route if your business runs through its own account.
• Personal statements. Available on some programs, useful if you are a sole proprietor who never separated the two.

If your business and personal money are mixed in one account, the standard 50% expense factor applies, and a lower factor requires the same kind of accountant documentation described above. If you have a separate business account and also deposit into personal checking, some programs will count personal deposits when you can show the transfers from the business account.

Deposits that are not income get excluded: transfers between your own accounts, loan proceeds, refunds, and one-time large deposits without a documented source. The underwriter will go through the statements line by line.

That is why, as your broker, we read your bank statements first and confirm the loan will work before anything goes to a lender. It saves you the hassle of a file that goes nowhere. It gets you an answer sooner. And it means we don't pull your credit, or have you commit to a lot of expenses, before you have any idea what you qualify for.

What You Need to Qualify

These vary by lender and by loan size, so treat this as the typical picture rather than a promise:

• Self-employed for at least two years, with meaningful ownership of the business. A common minimum is 25%.
• Credit score. Many programs start at 620. On most programs, your score mostly influences two things: your interest rate, and your loan-to-value, which is how much you can borrow relative to the home's value. The highest loan-to-value tiers typically need a 700 or higher.
• Down payment. Roughly 15% to 35% depending on score, property, and loan size. The best terms go to the largest down payments.
• Reserves. Depending on the loan amount, some programs require you to show several months of the new payment in savings after closing.
• Credit history. A minimum number of active accounts with some age on them.
• Property. Primary residences, second homes, and investment properties can all work on many programs. Condos and 2–4 unit properties are usually allowed too.

No tax returns are required for the self-employed borrower's income. If you have a spouse on a W-2 who is a co-borrower, their income is documented the normal way.

The Trade-Offs

• The rate can be higher than a conventional loan, since you are paying for flexibility in how your income is documented. Lately, though, we have been seeing bank statement loans priced comparably to most conventional loans.
• Some programs carry a prepayment penalty, only on investment properties. Check before you assume you can refinance freely.
• Waiting periods after a credit event are longer than agency loans in some cases, and vary by program. A credit event means something like a bankruptcy, a foreclosure, or late payments.
• Your bank or credit union may not offer it. Traditional lenders often don't, which is why many borrowers come to a broker for this loan. The rules also differ from one lender to the next, and the same file can qualify at one and not another.

If your tax returns already show the income you need, compare a conventional loan against a bank statement loan before you choose. Bank statement financing is for the borrower whose returns understate real income.

What Can Disqualify You

• Under two years of self-employment. Some programs make exceptions with a strong prior history in the same field, but it is not guaranteed.
• Deposits that do not hold up. Large unexplained deposits, frequent overdrafts, or a downward trend across the statement period all reduce qualifying income or end the file.
• Credit below the program minimum, or a recent bankruptcy, foreclosure, or pattern of late payments.
• Business that cannot be verified. Lenders check that the business exists and is operating, typically through a license, a listing, or a third-party verification.
• Savings that fall short of the program's reserve requirement after the down payment and closing costs.

Find Out Where You Stand

Start by checking current non-QM pricing, then give us a call or send us a message. Send 12 months of statements and we will estimate your qualifying income before you commit to anything.

Non-QM Rates →

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Related:

• Non-QM Mortgage Rates →

Source: Program terms from non-QM bank statement mortgage programs offered by lenders NetRate works with. Guidelines vary by lender and are subject to approval and change.

This is educational content, not financial advice. Bank statement loan programs, rates, and terms vary by lender and individual circumstances. Not all programs are available in all states. Licensed in California, Colorado, Oregon, and Texas. NMLS #1111861. Equal Housing Opportunity.