What Are Bank Statement Loans?
Bank statement loans are sometimes referred to as “self-employment mortgages.” They allow someone to borrow money without the documentation required by traditional lenders, like tax returns and W2s. A bank statement loan is typically used by entrepreneurs who might not be able to show a consistent background of earnings to verify salary.
How Do Bank Statement Loans Work?
Bank statement applicants aren’t required to supply things like employment verification forms, paystubs, tax returns, or W2s. Instead, they use their business or personal bank accounts to prove cash flow and income.
Some of the same documents are still necessary, however. The types of information that you might have to supply are:
- 12 to 24 months of business or personal bank account statements
- History of self-employment for two years
- A credit score that ranges from fair to good (minimum requirements are set by lender)
- Enough liquid reserves or cash to cover mortgage expenses
- Liquid asset verification (things like mutual funds or 401(k))
- Applicable business license
- Verification from an accountant or tax preparation service to prove -business expenses and verification that you file as an independent contractor
Bank statement loans usually involve more risk, so down payment requirements might be more substantial than normal, and the loans can come with higher interest rates
Who Benefits From a Bank Statement Loan?
Business professionals who have an inconsistent cash flow or those who can’t provide the documentation necessary to take a loan out from a traditional lender are prime candidates for a bank statement loan. Employment positions such as freelancers, consultants, contractors, doctors, real estate agents, investors, and lawyers usually have a harder time obtaining a loan. Sometimes a tax return doesn’t tell the whole picture, preventing credible borrowers from obtaining a loan.
Advantages of Bank Statement Loans
- You can have a higher debt-to
- income ratio
- No W2s, pay stubs, or tax returns necessary
- High loan limits
- Can be used on primary homes, investment purchases, and second homes
Disadvantages of Bank Statement Loans
- Larger down payment requirements
- Higher interest rates
- Not offered by all lenders