Are you self-employed? If you’re an entrepreneur, freelancer, or contractor, you may already realize how difficult it is to qualify for a mortgage. Conventional lenders use W-2s and tax returns-and after all the deductions and write-offs, your tax returns might not accurately reflect how much you make. That’s where bank statement loans come in!
Bank Statement Loan Qualification: Here’s How It Works
You can qualify using deposits from your business or personal bank accounts rather than tax returns. Most lenders offer two options: a 12-month program and a 24-month program. Each has its pros and cons when it comes to qualifying income, documentation requirements, and even interest rates, which we’ll review here.
What Is a Bank Statement Loan?
What is a bank statement loan? Bank statement loans are a specialized type of non-qualified mortgage (non-QM) designed for self-employed borrowers. Instead of relying on tax returns from the past two years, lenders review business or personal bank statements to calculate your average monthly qualifying income.
These loans can be particularly helpful for small-business owners, real estate investors, gig workers, consultants, and others whose tax returns may not accurately reflect their actual cash flow. The two most common options use 12 or 24 months of bank statements.
How the 12-Month Bank Statement Loan Works
With a 12-month program, the lender reviews your most recent 12 months of bank statements. Eligible deposits are added together, an expense factor is applied if you’re using a business account, and the resulting amount is divided by 12 to calculate your monthly qualifying income.
Advantages of the 12-month option:
- Shows your current income. If your business has experienced recent growth, averaging over the past 12 months helps reflect that growth rather than averaging down.
- Less paperwork. Collecting one year of statements is easier than two, which could make your application process quicker.
- Nice for new enterprises. If you have been self-employed for just over 12 months, this may be your only viable option, as there are a good number of lenders that require a minimum of one to two years self-employed.
Potential drawbacks:
- A solid year (or a disastrous year) carries a little more weight, so the lender might see this as a riskier proposition.
- The rates or the down payment may be less advantageous than the 24-month program, depending on the lender and on your file.
How the 24-Month Bank Statement Loan Works
The 24-month program follows the same approach, but extends the review period to two years. The sum of all your deposits over that time is averaged to arrive at the monthly qualifying income. Since it demonstrates a longer history, many lenders prefer to use this method.
Advantages of the 24-month option:
- Eliminates fluctuations in your income. A longer time frame can provide a more even, stable view of your income if you have fluctuating income or seasonal income.
- May provide better pricing. Longer income histories can mitigate the risk for lenders and, in some instances, may result in better pricing or looser underwriting guidelines.
- Good after a down quarter. If your last quarter was below average, a 24-month average can help ease the blow on the income for which you qualify.
Potential drawbacks:
- If you’ve earned a significant pay rise, the longer you’ve been earning less can drag down your average earnings and impact how much you can borrow.
- Require twice as many statements, taking up more time to file and explain deposits.
Which Option Is Better for You?
There isn’t necessarily a clear-cut choice. Which is better for you depends on how you get paid, your past business record, and what you want to accomplish. Here are some typical cases.
Go for 12 months if: your income has grown during the last 12 months, you got new large clients or several new contracts, you have not been self-employed for too long, or you prefer fewer documents to prepare and a faster departure.
Select 24-month if: You only have it for seasonal jobs, or your income has been consistently stable for multiple years, or your most recent year was weaker than the previous year, or you are trying to make your case that the long-term stability is the most convincing.
It’s not a bad idea to plug those into an average deposit calculator two ways. If the 12-month average is significantly higher and you meet the requirement, that might give you greater purchasing power. If they’re similar, you’ll probably be OK doing the 24-month term.
Another way to look at it is to consider your long-term plans. If you’re planning to refinance the loan in a few years, getting the lowest possible monthly payment might not be as important as qualifying for the loan now. If you’re planning to keep the loan for a longer period, it may be worth comparing the total costs.
Tips for Strengthening Your Application
- Don’t commingle business and personal funds. Clean, well-organized statements are always better for analyzing income and answering questions.
- Prepare for highlighting large or irregular deposits. Personal transfers or one-off payments could be deducted from income, so you will want evidence.
- Don’t burn your bridges. If you need to borrow in the future, your credit report and history count, as they will likely influence your interest rate and down payment.
- Create savings. Lenders tend to prefer cash reserves, so it is more common for a self-employed borrower to have them.
- Stay away from overdrafts & large new borrowing. Avoid doing this, as they flag up on your credit report and can impact your debt-to-income picture.
- Use a lender who knows the ins and outs of non-QM lending. The guidelines are all over the map, and having the right help can be life-changing.
Also Read: Bank Statement Mortgage Loans: How Self-Employed Borrowers Get Approved
Things to Keep in Mind
Bank statement loans are non-QM loans, so they have higher interest rates and down payments than traditional mortgages. But you’ll have the advantage of more flexible qualification criteria and an alternative way to prove income. Borrowers usually take out a bank statement loan to purchase a home or investment property and then refinance into a traditional mortgage after their tax returns show more income. Rates and other terms vary by lender and the borrower’s circumstances.
Final Thoughts
Both 12-month and 24-month bank statement loans can help self-employed borrowers who have difficulty qualifying through traditional income documentation achieve the American Dream of homeownership. A 12-month program may benefit borrowers whose businesses have experienced recent growth, while a 24-month program may work well for those with a more established income history. To make an informed decision, review your deposit history over both 12 and 24 months, compare the qualifying income calculations, and consult a mortgage specialist who can evaluate both options.
How Do You Qualify?
Are you ready to find out which program you may qualify for? Contact the team at Reliance Financial today to discuss your income, explore your bank statement loan options, and determine which program best fits your self-employment situation.
FAQs
Which is easier, a 12-month or 24-month bank statement loan?
It depends on how you earn. A 12-month program is a good fit if your income is steadily increasing, but if you have seasonal or irregular income, then a 24-month plan can even out those peaks and valleys of income over a longer period.
How long do I have to be self-employed to qualify?
Most lenders will require at least one to two years of self-employment, although it can be less for some programs. Certain programs will consider shorter periods of self-employment if you have relevant experience.
What documents are required for the application?
What documentation is usually required? You usually provide 12 or 24 months of personal or business bank statements, a photo ID, proof of business ownership, and sometimes a CPA letter. Each lender and program is different.
Is a Bank Statement Loan Costlier Than a Traditional Mortgage?
Bank statement loan rates and fees: Because bank statement loans are non-QM products, they tend to have higher rates than a traditional mortgage and may require a higher down payment. The advantage is that you can qualify based on income.
Can I get a bank statement program for my house?
Yes, several lenders have bank statement programs for primary residences, second homes, and investment properties. Others will refinance. This varies by lender and your qualifications.
