Bank statement loans, also known as self-employed mortgages, allow borrowers to secure a mortgage without the documentation that would normally be used to verify income, such as W-2s and tax returns. These loans, sometimes known as “alternative documentation loans,” are largely used by entrepreneurs and other self-employed borrowers who may not have consistent income or a single employer to prove their salary.
Instead of requiring tax returns, W-2s, pay stubs, or other employer verification forms, bank statement loan applicants can use their personal and/or business bank accounts to prove their income and cash flow.
The self-employed borrower will still have to provide some of the same documentation required for a regular mortgage loan. Below are the typical requirements for a bank statement loan:
- 12 to 24 months of personal or business bank statements (all pages)
- Two years’ proof of history as a self-employed professional
- 600 fico score or better (exceptions can be made)
- Some cash reserves after the down payment and closing costs
- Verification of any liquid assets, such as a 401(k) or mutual fund investment
- A business license, if applicable
- If using business bank statements, typically a letter from a tax preparer or accountant validating business expenses and confirming that filing is done as an independent contractor
Exact requirements and pricing will vary from lender to lender. For example, some mortgage lenders may accept lower credit scores than others, and some may allow gift funds while others will not.
If the borrower falls into this category, he/she may not be able to qualify for a conventional or FHA mortgage loan because the income reflected on the tax returns—which is often adjusted for deductions and business write-offs—might not reflect the true amount of income. Bank statements, however, tell a different story, allowing borrowers to qualify more easily.
Existing homeowners can also use bank statement loans when refinancing their mortgages. Cash out loans are a very attractive option now, as values have skyrocketed, and homeowners have a ton more equity. So, paying off high credit card debt or other bills may be very attractive.