What are Bank Statement Loans

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For mortgage options like conventional loans, lenders typically want to verify a borrower’s income with tax returns or W-2s. But not all borrowers have the kind of employment that gives them a W-2. When that is the case, a bank statement loan can potentially provide an alternate pathway to homeownership.  

Some borrowers may be able to qualify for a mortgage but can’t produce a W-2, pay stub or tax return to prove it. In this article, we will explain how bank statement loans work, who they are usually for, and some of their benefits and drawbacks.

What are bank statement loans?

As we alluded to above, bank statement loans are a type of mortgage built for borrowers without traditional incomes. Self-employed workers or business owners are common borrowers of bank statement loans.  

If you are considering a bank statement loan, it’s important to note that they are considered a non-qualified mortgage (non-QM). Non-QM mortgages are not regulated to the same extent that conventional loans and government-related loans are, such as Veterans Affairs (VA) or Federal Housing Administration (FHA) loans.  

Basically, they do not meet the rules set by the Consumer Finance Protection Bureau (CFPB), so they can potentially carry more risk for borrowers than other more regulated loan types. Non-QM loans can also have features like negative amortization, in which your principal increases over the loan term.  

So, while bank statement loans may be an option for some self-employed workers, independent contractors, or business owners, it would be wise to carefully consider the risks and have clear conversations with lenders about them.

How bank statement loans work

Many bank statement loans require borrowers to provide 12 to 24 months’ business or personal bank statements. These are used by the lender to verify your income. Note that if you’re a business owner, you might not need to own 100% of the business.  

The percentage of the business you would need to own could vary based on lender and whether you are providing business or personal bank statements. Talk to your lender about their specific guidelines. Sometimes, profit and loss (P & L) statements can also be used for income verification.  

Lenders will still want to determine your creditworthiness and ability to afford the mortgage, so they’ll look at your credit score and debt-to-income (DTI) ratio, as they would in other mortgage types. Minimum scores and DTI ratios will depend on your lender.

Pros and Cons

Pros of a Bank Statement Loan

Bank statement loans can be a good option for some borrowers. A couple of the benefits include: 

• Self-employed workers, independent contractors, or business owners can struggle to get a conventional mortgage. Bank statement loans might help them buy a home without tax returns or W-2s.  

• Some borrowers may qualify for larger loan amounts, as bank statement loans from certain lenders can have high loan limits. 

Cons of a Bank Statement Loan

As useful as this loan type can be for certain borrowers, it is not without its drawbacks. For example, when compared to conventional loans, bank statement loans may have: 

• Bigger down payment requirements. It is not uncommon that conventional loans will be approved with as little as 3% down. Some bank statement loans will require at least 10% down, if not more.  

• Higher interest rates. Rates vary from lender to lender and are impacted by the state of the market and your own personal financial situation. But non-QM loans, like bank statement loans, can be riskier for lenders, and therefore, often have higher interest rates.  

Also, as mentioned earlier, these loans can have features that would not be allowed for a conventional or government-insured loan. Be sure you have a clear understanding of the unique features of a bank statement loan from your specific lender.

1099 Mortgage vs Bank Statement Loan

Another non-QM loan that typically serves a similar type of borrower is the 1099 mortgage. These loans are fairly similar to bank statement loans, with the most notable difference being that they use a borrower’s W-9 or 1099 earning statements for income verification.  

If you’re a gig worker, contractor, or freelancer who receives a more regular 1099 income, the 1099 loan might be good for you. If you’re otherwise self-employed or a business owner with less consistent income or significant deductions, a bank statement loan might fit better.  

Lenders who offer these loans can help you navigate the differences and how they map onto your unique needs and goals.

Final Thoughts

Borrowers who don’t have traditional income streams often struggle to get a mortgage through conventional or government-insured loans. When that’s the case, non-QM options like bank statement loans could be a possible alternative depending on your situation. If you feel your type of employment is holding you back from homeownership, talk to a lender about these options.