Bank Statement Loans: The Self-Employed Mortgage

Traditional Conventional and FHA loans are designed for W-2 salary employees. When self-employed business owners apply for these standard loans, the underwriter looks at the "Bottom Line" of their tax returns. If a business grosses $500,000 but writes off $450,000 in expenses, the bank says the borrower only makes $50,000 a year and denies the loan.

The Bank Statement Loan is a Non-Qualified Mortgage (Non-QM). Instead of looking at tax returns, the underwriter averages the total gross deposits made into your bank accounts over a 12-to-24 month period to determine your true cash flow and purchasing power.

Who Qualifies?

To be eligible for this program, you must be self-employed. Typically, you must own at least 25% of the business or operate as an independent 1099 contractor. You must also prove the business has been operational for at least two years (often verified by a CPA letter or business license).

The way your income is calculated depends entirely on whether you provide your Personal bank statements or your Business bank statements.

Using Personal Bank Statements

If you pay yourself by transferring funds from your business account to your personal account, the underwriter will generally allow 100% of the deposits shown on your personal bank statements to count as qualifying income. (Note: The underwriter will look at 2-3 months of business statements just to verify the business is the actual source of the transfers).

Using Business Bank Statements (The Expense Factor)

If you run all of your finances through a single business account, the underwriter cannot count 100% of the deposits as income, because a portion of that cash goes toward running the business (inventory, payroll, etc.). Therefore, an Expense Factor is applied.

• The Standard 50% Rule: By default, many lenders will apply a 50% expense ratio. If your business account grosses $20,000 a month in deposits, the lender assumes your expenses are $10,000, and uses the remaining $10,000 as your qualifying monthly income.
• The CPA Letter Exception: What if you run a consulting business from home and your actual expenses are only 15%? You can have your licensed CPA draft a letter stating your true expense ratio. The underwriter will then use that lower percentage, drastically increasing your qualifying income.

Warning on Large Deposits: Underwriters will scrutinize statements for abnormally large deposits that are out of character for your business. If you suddenly deposit $50,000 from the sale of an asset, it will likely be excluded from the 12-month deposit average unless it is standard for your industry.

Because the lender is taking on more risk by not requiring tax returns, Bank Statement Loans generally require slightly stronger credit and a larger down payment than standard government loans.

Down Payment Tiers

Most Non-QM lenders require a minimum of 10% to 20% down. If you put down 10%, you will face higher interest rates and stricter credit score requirements (often 680+). A 20% down payment opens up the best pricing tiers and more flexible underwriting.

Eligible Property Types

Unlike DSCR loans, which are strictly for investment properties, a Bank Statement Loan can be used to purchase a Primary Residence, a Second Home, or an Investment Property. You can buy single-family homes, townhomes, or approved condominiums.