When you apply for a mortgage, lenders typically require proof of income via pay stubs, W-2s, and tax returns. But with a bank statement mortgage, borrowers can use their bank statements instead of tax documents to verify income.
For self-employed workers, who currently number more than 9 million and sole proprietors (another 20-plus million), using bank statements can demonstrate their real income instead of the lower figure that might be reported on a tax return after deductions.
Read on to learn how you can leverage your bank statements to qualify for a mortgage.
Key Points
• Bank statement mortgages use bank statements to verify income, suitable for self-employed individuals.
• Lenders require 12 to 24 months of bank statements to assess net income.
• Pros include no need for W-2s or tax returns, and eligibility for second homes.
• Cons involve higher down payments and interest rates, and limited lender availability.
• Lenders apply an expense ratio to business bank statements and use 100% of personal deposits for income.
What Is a Bank Statement Mortgage?
A homebuyer who is self-employed, by any name — sole proprietor, independent contractor, a member of a business partnership, freelancer, or gig worker — or anyone else may qualify for a bank statement mortgage loan, also known as a self-employed mortgage, by submitting personal or business bank statements.
A bank statement lists all transactions made in an account during a set period of time, usually a month. The sum of the transactions — deposits, charges, and withdrawals — is used to calculate the beginning and ending balances for that period. In place of tax returns, this account information is used to verify you have enough income and cash flow to cover a down payment and monthly loan payments.
Lenders offering bank statement mortgages may ask for 12 to 24 months of statements to determine the borrower’s net income — how much they earned after taxes and business write-offs. Typically, the bank statements cover the time period immediately preceding the loan application.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
How Does a Bank Statement Mortgage Work?
So, what is a bank statement mortgage in practice? As with any mortgages, lenders can consider your credit score, work history, and proof of liquid assets as part of the loan application. But a bank statement mortgage differs in at least one way.
Whether you deposit income from your business directly into a personal bank account or into a separate business account affects how your income is calculated.
Lenders may apply an expense ratio to business bank statements with the understanding that part of the deposits go toward business expenses. This means that only a percentage — usually 50% to 85% — of qualifying deposits is used to calculate income. (However, it’s possible to obtain a lower expense factor with a statement from a certified public accountant or tax preparer.)
If you deposit income to your personal account from your business account, 100% of deposits can count toward calculating the bank statement mortgage you can afford. Without a separate business account, though, deposits to a personal account also receive an expense ratio.
Note that lenders can also factor in your ownership percentage in a business when calculating gross monthly income from business bank statements.
Here’s an example of how these two scenarios would work for the same self-employed person applying for a 12-month bank statement mortgage.
Business bank statement: ($84,000 in deposits / 12 months) x 50% expense ratio = $3,500 gross monthly income
Personal bank statement: $84,000 in deposits / 12 months = $7,000 gross monthly income
With this monthly gross income figure, the lender will assess monthly debt payments to calculate the debt-to-income ratio and determine the loan amount you qualify for.
Recommended: Understanding Mortgage Basics
Who Should Get a Bank Statement Mortgage?
Prospective homebuyers who don’t have consistent cash flow or who lack proof of income from an employer like W-2s and pay stubs could benefit from a bank statement mortgage.
Self-employed workers often claim tax deductions for business expenses to lower their tax liability, which makes their income appear lower on tax forms. Therefore, without using bank statements, many sole proprietors, contract workers, and freelancers will qualify for a smaller mortgage amount than they can actually afford.
Bank statement mortgage loans could also be advantageous for seasonal workers. Since gross monthly income is calculated as an average during the full time period covered by the bank statements, when the deposits occur within that time frame is less important. (Incidentally, if you’re seeking a personal loan there are similar considerations to getting a personal loan when self-employed.)
Recommended: Understanding the Different Types of Mortgage Loans
Pros and Cons of a Bank Statement Mortgage
Bank statement mortgages represent an alternative to conventional mortgage loans that lends itself to self-employed and seasonal workers. But it’s important to consider the pros and cons when shopping for a mortgage.
| Pros of Bank Statement Mortgage | Cons of Bank Statement Mortgage |
|---|---|
| Can qualify without W-2s, pay stubs, or tax returns | May require a higher down payment than other types of home loans |
| Often eligible for second homes and investment properties | Generally carries higher interest rates |
| Private mortgage insurance is not required if buyer puts 20% down | Not all lenders offer this loan product |
| May offer higher loan limits | Can require being in business for years to qualify |
How to Find a Bank Statement Mortgage
Bank statement mortgages are considered non-qualified mortgages (non-QM), which means they may lack certain features and protections, so not every lender uses them. Though less common than traditional mortgages, many lenders, including banks and credit unions, offer bank statement mortgage loans.
Since bank statement loans are non-QMs, it’s natural to have questions about mortgage terms and requirements.
For instance, it’s worth asking about mortgage points — fees paid to a lender for a lower interest rate — since the limits on points and fees for a qualified mortgage do not apply.
Recommended: Mortgage Calculator
Alternatives to a Bank Statement Mortgage
Prospective homebuyers have a range of financing options to choose from, even if they’re self-employed.
Getting prequalified and preapproved can give you an idea of how much home you can afford, and a specific amount, respectively.
A mortgage loan originator will convey the loan terms you might qualify for and available financing options.
• Conventional home loan: Conventional loans tend to come with competitive interest rates and are originated, backed, and serviced by private mortgage lenders.
• FHA loan: Insured by the Federal Housing Administration but administered by approved private lenders, an FHA loan allows for down payments as low as 3.5% and lower credit scores than conventional loans.
• USDA loan: A USDA loan, backed by the U.S. Department of Agriculture, is designed to make homeownership affordable for low-income buyers in designated rural areas.
• VA loan: Eligible service members, veterans, and eligible surviving spouses can obtain VA loans, guaranteed by the Department of Veterans Affairs, with competitive interest rates, no down payment, and minimal closing costs.
If you’ve been self-employed for two years, or one year self-employed plus two years in a similar role with comparable income, you may still qualify for one of the above loans.
Recommended: Help Center for Home Loans
The Takeaway
Being self-employed does not prevent borrowers from getting financing for a home purchase or refinance. A bank statement loan could be a solution if your tax returns don’t fully capture what you can afford. But you may also qualify for a conventional loan or other type of financing.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Are bank statement mortgages good?
Bank statement mortgages can be advantageous for self-employed homebuyers or refinancers, but they can have higher interest rates and down payment requirements. It’s worth checking to see if you’re eligible for conventional or government-backed loans first.
How much of a down payment is required for a bank statement mortgage?
Typically, bank statement loan lenders require a 20% down payment, or 10% if purchasing mortgage insurance.
Can I use a bank statement loan on a second home?
Yes, bank statement loans can be used for a second home, as well as vacation homes and investment properties.
Do bank statement mortgages work for refinancing?
Yes, homeowners can refinance with a bank statement mortgage, including applying for a cash-out refinance if they have enough home equity.
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency. †Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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