If you’ve heard of “bank statement loans,” you might be wondering what exactly is a bank statement loan?

Whereas traditional mortgage loans require tax returns during the loan approval process, bank statement loans do not.

Self-employed individuals and business owners, whose tax returns often do not accurately portray their financial picture can use bank statement loans.

Bank statement loans are a powerful tool for self-employed borrowers to obtain alternative financing where traditional lenders say “no”.

They can qualify by using the average monthly deposits into their business or personal bank account.

A. What Are Bank Statement Loans?

These are not the type of loans that were prevalent in the pre-2008 financial crisis, and no longer are the days in which loan applicants can simply state their income on a loan application with virtually no due diligence conducted by the lender.

After the 2008 financial crisis, the sweeping provisions of Dodd-Frank changed the industry substantially, at least in the owner-occupied residential context. Since 2010 Dodd-Frank has required lenders to document a residential borrower’s ability to repay the loan.

Bank statement lenders still want to ensure borrowers can repay their mortgages; they just use bank statements to verify income as opposed to tax returns. Self-employed borrowers are able to document their ability to repay based on business deposits into their personal or business bank accounts, i.e., their true cash flow.

B. Why Use Bank Statement Loans?

1) The Difference

Traditional mortgage lenders require tax returns, W-2s, and paycheck stubs in order to determine monthly income. For salaried and hourly borrowers, the lenders look at gross income for qualifying purposes. But for self-employed borrowers, traditional mortgage lenders look at net income, the adjusted gross income showing on tax returns. This puts self-employed borrowers at a disadvantage because the typical self-employed or 1099 employee will write off as much expense as possible from their gross income on their tax returns to minimize how much they owe once tax season comes around.

Borrowers still must qualify based on the income deposited over a given period, typically verified on 12 or 24 months of bank statements.  The total deposits in the bank statement period are the gross income used.  Once this number is established, the debt to income ratio or DTI is derived (based on the income against the new mortgage payment and current monthly minimum debt obligations i.e. credit card, car loan, student loans, etc.) to ensure the borrower can afford the addition of the mortgage loan payment. If all aspects of the borrower’s finances are within the program requirements and a DTI no higher than 55%, the lender will be able to underwrite and finance the loan.  These loans are repackaged and sold on the secondary market just the same as traditional mortgage financing.

2) Qualifying

This is an incredible and expanding area of mortgages that levels the playing field for self-employed and 1099 employee borrowers, providing the opportunity to qualify without tax returns. These types of loan programs can be used for both owner-occupied, and non-owner-occupied 1-4 unit properties, the same as traditional financing allows.

The best bank statement loans, borrowers still must qualify based on the income deposited over a given period, typically verified on 12 or 24 months of bank statements. The gross amount deposited in the given amount of time is then considered their “gross income”. Once this number is established, the debt to income ratio or DTI is derived (based on the income against the new mortgage payment and current monthly minimum debt obligations i.e. credit card, car loan, student loans, etc.) to ensure the borrower can afford the addition of the mortgage loan payment. If all aspects of the borrower’s financial is within the program requirements and a DTI no higher than 55%, the lender will be able to underwrite and finance the loan. These loans are repackaged and sold on the secondary market just the same as traditional mortgage financing.

This is an incredible and expanding area of mortgages that levels the playing field for self-employed and 1099 employee borrowers, providing the opportunity to qualify without tax returns. These types of loan programs can be used for both owner-occupied, and non-owner-occupied 1-4 unit properties alike the same as traditional financing allows.

C. What Does A Bank Statement Loan Look Like?

1) Self-Employed Requirement

Bank statement loan programs will typically require a borrower to be self-employed for a minimum of two years. This is verified either through appropriate business licenses and/or a letter from a tax preparer. In addition, if the borrower owns more than one business, typically lenders will allow using all business accounts to be used to verify income.

Furthermore, a self-employed or 1099 employee, using a bank statement loan program, may also include W2 earnings from non-self-employed income and/or a non-self-employed co-borrower in terms of qualifying income.

2) Bank Deposits

Once again, bank statement loan programs review 12-24 months consecutive bank statements to determine annual income based on the gross deposits. No tax returns are requested or reviewed, instead, the lender will determine an average monthly total of qualifying income deposits over the appropriate period. (ex. $100,000 in deposits / 12 months = $8,333.33 gross monthly income)

Bank statement loan programs will look at either personal or business accounts, depending on which account is used as their primary income deposit account. However, regardless of the account, only income deposits are considered in the income equation in most cases. All lenders have their own different caveats to their programs. That is why using a mortgage broker is essential. For instance, one lender may only use the net deposits discounting the withdraws from the total dollar amount deposited. Whereas another may take 100% deposits into the account as income. A mortgage broker will be able to determine the best lender option based on each individual scenario.

(a) Business Bank Statement

If business bank statements are used, the borrower needs at least 50% owner of the business. The deposits will be discounted based on the appropriate ownership percentage. As an example, 100,000 in deposits at 50% ownership = $50,000 in considered annual income. This is the case unless the business accounts for the borrower’s 50% of business income.

In general, the lender will apply a default 50% expense ratio, meaning that 50% of deposits count as qualifying deposits (because 50% are presumed to go towards business expenses). If true business expenses are less than 50%, with an appropriate tax preparer letter and/or Profit & Loss statement, lenders will allow up to 95% of deposits to count as qualifying income with additional factors considered such as industry and number of employees.

(b) Personal Bank Statements

Personal bank statements are great because 100% of deposits are used to qualify. There is a difference between using personal statements the business bank statements. It comes with the assumption that the expenses have been deducted from the gross income of the business bank statements.  This makes the net business income 100% of deposits into the personal account. An additional requirement to using 100% of the deposits is the borrower must have a business account. If the borrower doesn’t have business accounts, the personal bank statements will be treated as a business account.

3) Income, Debts & Credit

After determining total qualifying income, the next step is to total up all debts, including the new mortgage payment. All monthly debts are viewed in conjunction with a total monthly qualifying income, and most lenders will allow up to 50% debt-to-income (“DTI”) ratio when qualifying borrowers for a loan.

Most bank statement loan programs will require a minimum 620 credit score, although each has its own guidelines. Credit requirements for bank statement loans often mirror those of more traditional loan programs because outside of the income verification, all others.

4) Down Payment, Rates & Costs

The minimum down payment on a bank statement loan can be as low as 10% to 20% depending on the lender. That said, these minimums can be affected by several factors including market volatility and a number of investors on the secondary markets purchasing these types of loans. Minimum down payments are always good to know but as with any mortgage lending program, the larger the down payment the lower the interest rate with additional determining factors. A borrower can receive assistance from relatives through gift funds

Rates for bank statement loans are generally higher than traditional loans (based on increased perceived risk to bank statement lenders), but all other typical loan fees are similar, such as origination points, broker and lender fees, appraisals, title, and escrow, etc.

5) Jumbo Bank Statement Loans

It is also possible to get a “jumbo bank statement loan.” These simple bank statement loans above a certain dollar amount, above and beyond the county loan limits as per the individual county. For example, California Jumbo Loans start above minimum loan amounts ranging as per California county loan limits for 1 to 4 unit properties.

6) Commercial Bank Statement Loans

Commercial bank statement loans require a similar analysis of bank statements to determine a borrower’s qualifying income. However, there are also significant differences, and if you are looking to learn more about commercial bank statement loans click here.

D. What Bank Statement Loans Are NOT

1) Bank Statement Loans Are NOT True Stated Income Loans

(a) Once again, bank statement loans require income verification.

The income verification is based on bank account deposits. In the residential, owner-occupied arena, Dodd-Frank has eliminated “true” stated income loans.

(b) Bank Statement Loans Are NOT “No Tax Return Investment Property Loans”

Borrowers that fall outside traditional underwriting guidelines but are looking for long-term loans with more attractive rates. The bank statement loan is a great option but is not a rental loan. These loans do not require tax returns but do require a debt-to-income ratio calculation which is based on the gross deposits. They provide more flexibility and no AGI (Adjusted Gross Income) finding for qualifying. Follow this link for more information on investment property loans.

E. Finding The Best Bank Statement Lenders

Many bank statement lenders do not have a retail channel, meaning they will only fund loans through a broker. The best brokers spend many hours scouring thousands of loan programs to find the best rate and terms for their clients. It is in the broker’s best interest to find the lowest rate and most favorable terms available in order to close the deal.

Make sure all deposits go into one account if you are purchasing or refinancing real estate.  The account can be for personal or business use and will ensure all deposits are counted. Saving for a down payment and accumulating months of enough deposits takes time, so it is a good idea to speak with a broker far in advance of desired purchase date.

F. Advantages And Disadvantages of Bank Statement Loans

1) Pros of Bank Statement Loans

• • “No tax returns required
  • Allows self-employed individuals and 1099 contractors to qualify
  • Qualify even if the business is showing a loss
  • Comply with Dodd-Frank and receive all appropriate borrower protections

2) Cons of Bank Statement Loans

• • Must be in business for at least 2 years, showing the steady flow of deposits
  • Not available to salaried borrowers (although non-self-employed co-borrowers allowed)
  • Rates are slightly higher than traditional mortgages (but not more)
  • None of the government programs (such as FHA, VA, or USDA) apply

G. The Bottom Line

Bank statement loans have become increasingly popular as a viable option for self-employed borrowers for home financing. They are ideal for those who make enough income to support a mortgage but can’t qualify with tax returns.

Self-employment should not make it more difficult to secure a home loan. Whether you are a small business owner or an independent contractor the bank statement loans are great ways to homeownership. Speak to a mortgage professional at Valor Lending Group to discuss how you can qualify.

Gregory Riggs Esq.