What is a bank statement loan?
With a bank statement loan — also known as a stated income loan — you won’t need to provide your lender with some of the typical financial documents needed for a mortgage, such as W-2s and tax returns. Instead, you’ll use bank statements to prove income. This can be helpful if your income is inconsistent, your employer doesn’t issue traditional paychecks or you claim significant tax deductions. This might apply if you’re a small business owner, doctor, lawyer or real estate agent or investor, for instance.
How do bank statement loans work?
The application process for a bank statement loan differs slightly from that of a traditional mortgage, and getting preapproved or prequalified can be a bit more challenging.
When you apply, you’ll provide the lender bank statements as far back as two years for both personal and business accounts. You’ll also need to disclose other information about your business and expenses, if applicable.
The lender then analyzes your income to determine your net income. From there, if you meet the lender’s other requirements, you’ll be preapproved for a certain loan amount.
Bank statement loan example
Let’s assume you’re self-employed, have a credit score of 740 and want to purchase a home. Your income fluctuates month to month, averaging out to $6,875. You also put $800 a month toward other debt payments. If the lender allows a DTI ratio of up to 45 percent, you could potentially qualify for a mortgage with a monthly payment of about $2,295. The exact number will vary widely based on current mortgage interest rates, your down payment and other factors.
Bank statement loan requirements
Generally, you can qualify for a bank statement loan with a credit score as low as 620, but a 700 or higher gets you a better rate and terms. If your credit score is on the lower end, though, you might also need to make a larger down payment. Doing so minimizes the risk posed to the lender.
Overall, expect to meet the following requirements:
- Provide two years’ worth of bank statements
- Provide a profit and loss statement for your business
- Make at least a 10 percent down payment
- Have adequate cash reserves
- Have a credit score of at least 620
- Have a DTI ratio of 45 percent or lower (some lenders allow a higher percentage)
- Provide business licenses, organization documents and other related paperwork