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What is a Bank Statement Loan?

Bank statement loans are a type of non-qualified mortgage loan that allows you to qualify based on bank statements instead of tax returns. The lender will require prospective borrowers to provide a certain number of months worth of bank statements in order to prove their ability to repay the loan. This enables self-employed borrowers to access home loans, even if their taxes don’t reflect their full income. Bank statement mortgage programs are often a good option for self-employed individuals, business owners, and retirees who need an alternative income verification option.

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Bank statement loans have taken over the traditional stated income loans as an alternative for borrowers who are unable to verify their income in the traditional way by providing the previous two years tax returns, W2s and pay stubs. These are non-QM loans, nontraditional loans or expanded criteria loans that allow other forms of documentation to prove the ability to repay. Just as it sounds, a bank statement loan allows the borrower to verify his or her income with bank statements.

Pros

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  • No income verification: Bank statement loans do not require traditional income verification, making them a great option for self-employed individuals or those with non-traditional income sources.

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  • Faster approval process: Since bank statement loans do not require extensive income verification, the approval process is often faster than traditional loans.

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  • Higher loan amounts: Bank statement loans may allow for higher loan amounts than traditional loans, making them a great option for those looking to finance larger purchases.

Cons

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  • Higher Rates: These loans often have higher interest rates than traditional loans, which can make them more expensive over time.

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  • More Documentation: They may require borrowers to provide more documentation than other types of loans, which can be time-consuming and frustrating.

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  • Tougher Qualification: Bank Statement loans may be more difficult to qualify for than other types of loans, which can make them a less attractive option for some borrowers.

Example

Borrower: John, a self-employed business owner

Financial Situation:

  • John has been running his own consulting business for the past two years.

  • He has a variable income stream due to the nature of his business.

  • Traditional income documentation (W-2s or tax returns) may not accurately reflect his current financial situation.

Loan Details:

  • Loan Purpose - Purchase of a primary residence

  • Loan Amount - $300,000

  • Loan Term - 30 years

  • Interest Rate - 7%

Income Documentation - Instead of traditional income verification documents, John provides the lender with 12 months of his personal and business bank statements.

Bank Statement Analysis:

  • Monthly Average Deposits - $15,000

  • Lender analysis - The lender reviews the bank statements to assess John's income and ability to afford the mortgage. The fluctuating income is considered, and the average monthly deposits are used to calculate a reasonable income for loan qualification.

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In this scenario, the Bank Statement loan allows John, a self-employed individual with variable income, to qualify for a mortgage without relying on traditional income documentation. The lender considers his business and personal bank statements to assess his financial stability and approves the loan based on the demonstrated ability to make monthly payments. This type of loan is suitable for self-employed individuals or business owners who may have non-traditional income structures.

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