What Is a Bank Statement Loan?

A bank statement loan, also known as a stated income loan, allows borrowers to qualify for a mortgage without traditional income verification methods, such as W-2s or tax returns. Instead, lenders use personal or business bank statements to assess income, making these loans ideal for self-employed individuals, small business owners, and professionals with fluctuating earnings.

For example, a borrower may report $150,000 in taxable income but actually earn $250,000 before deductions. Since tax returns often reflect business expenses that reduce reported income, bank statements provide a clearer picture of financial strength.

How Do Bank Statement Loans Work?

To qualify, borrowers typically submit two years of personal and business bank statements. Lenders evaluate income trends, business expenses, and other financial details to determine eligibility. Key factors include:

• Business type and structure
• Number of employees
• Presence of a physical business location
• Net income after expenses

If the applicant meets the lender’s requirements, they receive preapproval for a loan amount based on income and creditworthiness.

Bank Statement Loan Requirements

Lenders establish varying criteria, but most bank statement loans require:

• Bank Statements – Typically, two years of personal and business statements
• Credit Score – Minimum 620, with better terms for scores above 700
• Down Payment – At least 10% of the home’s purchase price
• Debt-to-Income (DTI) Ratio – Usually under 45%
• Cash Reserves – Sufficient savings to cover mortgage payments
• Business Documentation – Proof of business ownership, licenses, or profit and loss statements

Stronger financial profiles often secure better interest rates and loan terms.

How to Apply for a Bank Statement Loan

If a lender does not offer bank statement loans, a mortgage broker can help. Brokers work with multiple wholesale lenders, expanding available mortgage options. While brokers do not charge borrowers directly, their fees may be reflected in slightly higher interest rates. It’s crucial to choose a licensed broker with experience in bank statement loans.

Steps to Secure a Bank Statement Loan

1. Get Preapproved – Discuss financial details with a loan officer to determine potential borrowing limits.
2. Compare Offers – Review estimated closing costs, APRs, and lender fees.
3. Submit an Application – Provide required documents to complete the formal mortgage application.

Pros and Cons of Bank Statement Mortgages

Pros

• Flexible Income Verification – Allows self-employed borrowers to qualify using bank statements.
• Higher Loan Limits – Lenders may approve larger amounts compared to traditional mortgages.
• Broader Accessibility – Available to borrowers with credit scores as low as 620.

Cons

• Higher Interest Rates – Lenders charge more due to the increased risk.
• Larger Down Payment – A minimum of 10% is typically required, higher than FHA or conventional loans.
• Potential Prepayment Penalties – Some lenders impose fees for early repayment or refinancing.

Bank Statement Loans vs. Traditional Mortgages

Bank statement loans fall under non-qualified mortgage (non-QM) loans, meaning they do not conform to Fannie Mae or Freddie Mac guidelines. This classification makes them riskier, leading to fewer borrower protections and potentially higher interest rates.

In contrast, traditional mortgages, such as 30-year fixed-rate loans, FHA loans, or VA loans, require standard income verification (W-2s, pay stubs, or tax returns). They typically offer lower interest rates and down payments as low as 3%. However, they do not accommodate borrowers with unconventional income streams as easily as bank statement loans.

Alternative Mortgage Options

For borrowers exploring other options, several alternative loan programs exist:

• Conventional Loans – Require stable income and offer competitive rates.
• FHA Loans – Feature flexible credit requirements, ideal for first-time buyers.
• VA Loans – Provide zero-down mortgages for eligible military personnel and veterans.
• Asset Depletion Loans – Allow qualification based on liquid assets instead of income.
• DSCR Loans – Designed for real estate investors, assessing rental income instead of personal earnings.
• Interest-Only Loans – Offer lower initial payments but require lump-sum repayment or refinancing later.
• Portfolio Loans – Issued by private lenders with customized terms, often for high-net-worth individuals.

Is a Bank Statement Loan Right for You?

For self-employed individuals or those with irregular income, bank statement loans provide a viable alternative to traditional mortgages. However, they come with higher costs and stricter lending terms. Comparing options and working with an experienced mortgage professional ensures borrowers find the best solution for their financial situation.

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