Bank statement loans are a type of mortgage that are based on the borrower’s bank statements rather than traditional income documentation. These loans are typically available to self-employed borrowers who may have a harder time documenting their income using traditional methods due to write offs or unexpected expenses that are acquired throughout the year.
One of the main requirements for a bank statement loan is that the borrower must be self-employed. This can include business owners, freelancers, and contractors. Some lenders may also consider bank statement loans for borrowers who are on commission or have other forms of non-traditional income, but these are on exception basis only.
To qualify for a bank statement loan, borrowers are typically required to provide their bank statements for the past 12 to 24 months. The lender will review the bank statements to verify the borrower’s income and assess their ability to repay the loan. Is how this typically works is the lender will add up all deposits on the bank statements over the period of time requested, for example, 12 months of bank statements, and then average that out, while also deducting an expense factor (typically 25%). An example of this would be if you have $100,000 in deposits into your bank statements over a 12 month period, the lender would then take 75% of that, or $75,000, and divide that out to use on a bank statement loan for your monthly income. In this scenario, the monthly useable income for a bank statement loan would be $6,250.
In addition to providing bank statements, borrowers will also need to meet other requirements to qualify for a bank statement loan. These include a minimum credit score, a maximum debt-to-income ratio, and a minimum down payment, among others factors that vary per lender.
Some lenders may also require additional documentation, such as a business license, tax returns, or proof of business ownership, to verify the borrower’s self-employment status.
One of the main advantages of a bank statement loan is that it can be easier to qualify for than a traditional mortgage if you’re self-employed. However, these loans can also come with higher interest rates and fees compared to traditional mortgages, so it’s important to carefully consider the costs and terms before applying for a bank statement loan.
If you’re self-employed and are having trouble qualifying for a traditional mortgage, a bank statement loan might be a good option to consider. Just be sure to do your homework and shop around to find the best loan for your needs and the best lender to fit your scenario. Remember, a bank statement loan is based on your bank statements, so it’s important to maintain good financial habits and keep your bank accounts in good standing.