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What is a Bank Statement Mortgage? 

 February 26, 2022

By Scott Teesdale  

minutes read time

A bank statement mortgage is a special type of mortgage that allows the homeowner to qualify for a mortgage and borrow money based on only the assets in their bank account and not just their monthly or annual income. The type of mortgage is popular with small business owners or other borrowers who have a lot of assets but not a lot of cash flow. Specifically, anyone who does not receive W2 income or long-term and consistent 1099 income will want to research whether a bank statement mortgage is right for them (like entrepreneur mortgages).

Bank statement mortgages are one of the best ways for small business owners, self-employed persons, and real estate investors to get the funding they need to buy a home. If you’re thinking about getting a bank statement mortgage, you probably have a lot of questions about these types of home loans, like how to qualify and how long it takes to close on the mortgage. While they are not a very common method used to purchase a home, these types of mortgages have been around for decades.

Who should use a bank statement mortgage?

Bank statement mortgage programs can be used by anyone, but they are most commonly used by people who are self-employed. Rather than provide all of the documentation required to verify income for a business, self-employed borrowers can use these loans to skip a lot of the paperwork they would otherwise need to gather together in order to obtain a mortgage.

What is needed for a bank statement mortgage?

Personal bank statements are critical, of course, but borrowers might also be asked to provide other documents to verify their identity with the following types of documents:

  • Verification of other real estate holdings and vehicles. This may require forms such as titles.
  • Verification of the ownership of business assets.  This may or may not be required, it usually depends of on the age and stability of the business. 
  • Tax returns for both the borrower and the business. 
  • Business bank statements or other documents from the business bank accounts.
  • Knowing how much our house is worth will help you qualify for a mortgage.

Today, it’s common for banks to accept electronic versions of these documents, and it may be possible for a loan officer to locate some of these documents on their own. Also note, you should check if your state is a notary document state, meaning that the documents you submit to the lender must be notarized.

How many months of bank statements do mortgage lenders require?

How far back a potential borrower’s bank statements need to go is up to individual lenders. However, it is most common for lenders to ask for up to a year’s worth of statements, and the best rates are usually reserved for borrowers who can provide 24 months’ worth of statements.

How do bank statement loans work?

The main thing that underwriters are looking for is a consistent history of income. Specifically, they’re looking to see if there is enough money to cover the proposed new mortgage payments. It’s important to note that most banks will not care how often income arrives in the account. They will typically take an average over several months or a year to determine an average amount of monthly or quarterly income. This income amount needs to be at least three to four times higher than the proposed payments on the mortgage.

Business bank statements and personal bank statements may be requested, depending on the type of mortgage that is being applied for. There are many factors to consider when choosing a mortgage and if a business is being used to provide collateral, statements from the business may be asked for. In these cases, the mortgage lender will be looking not only at the income from the business but also the business expenses.

Banks may also look at bank statements for anything that is highly irregular. While the number of payments is not an issue, they will likely question the reasons behind payments that are vastly different from each other. This does not mean that the mortgage will automatically be denied, however. There are often very good reasons why income would show up sporadically, and as long as the borrower can explain the reasons behind the discrepancies, it is rarely a problem. Banks are accustomed to business owners who have busy and slow seasons, as well as business owners who have made the choice to invest in their business rather than make a profit.

Finally, banks will look to see if there are any spending patterns that would indicate a problem. This is rarely a particularly close look, but expect questions if large cash withdraws are taken on a regular basis, or if the account is frequently overdrawn.

What credit score is needed for a bank statement mortgage?

The credit score that is needed is almost always dependent on the exact type of bank statement loan that is being asked for. If the bank statement loan is being made solely to an individual, a credit score of at least 680 is usually desired, with 720 or higher being the most ideal. If a business and/or its assets are being used to back the loan, it is possible to find bank statement loans that don’t even look at the credit score of the individual borrower.

Even if a bank does not ask for a credit score, they will still be looking very closely at the self employed borrower’s ability to make monthly payments. This will mean a detailed look at monthly income and expenses, and a calculation of their debt to income ratio.

Can you refinance a bank statement mortgage?

It is possible to refinance a bank statement loan into a conventional mortgage, and a bank statement loan into a new bank statement loan. The most common case for doing this is that the terms or interest rate of the new loan are more favorable than the old loan, of course. Going from a bank statement loan to a conventional mortgage is usually easier than going into another bank statement loan because the latter would require the borrower to follow all the same steps we’ve outlined above (for example, the borrower has to meet the terms and income verification required of the new loan). For this reason, many business owners will wait until their business is more established (refinancing can take a long time) and capable of producing the regular steady income required for a conventional mortgage.

Can you refinance into a bank statement mortgage?

Refinancing into a new bank statement mortgage from either a conventional mortgage or from another bank statement mortgage is possible. Speak with your lender about the details but the refinance process is no different than the mortgage origination process. Keep in mind that bank statement loans have a higher hurdle than conventional loans and require much more paperwork.

Tips to refinance a bank statement mortgage

If you’re thinking about refinancing your existing mortgage into a bank statement loan, start by collecting your business bank statements and personal bank statements. To get the best payment terms, self-employed borrowers will need to show the bank that they are a low risk. If business assets can be used to back up the loan, that can go a long way towards getting good loan terms. It’s also very helpful to have a high credit score and many years of income history. Be prepared to show several years of tax returns to the mortgage lender.

 Bank statement mortgage rates today

While mortgages rates for bank statement loans have historically been slightly higher than traditional mortgage rates, there are some bright sides.  Mortgage rates, in general, are at record low levels, but due to the higher level of risk with these types of loans, they are currently running about one to three points higher than “conventional” loans.  

To get a better rate, it may be necessary to work with a lender you know directly.  Unlike conventional loans, bank statement loans are often handled on a case-by-case basis by many banks, and personally knowing your lender is a good way to get better rates.

Drawbacks of bank statement loans

There are a few drawbacks to bank statement loans that self-employed borrowers should be aware of. To start, it can be trickier to learn about how bank statement loans work. While there are plenty of neutral sources to learn about conventional mortgages, bank statements mortgages are rarely written about.

Because these loans do not have the same level of market reach as conventional mortgages, bank statement loan programs can be harder to find. It may take several tries before finding a bank or mortgage lender willing to underwrite this type of home loan.

Many mortgage brokers and lenders tend to view these types of loans as higher risk, and will tend to charge higher interest rates. There is also more work involved in underwriting these types of loans, making the origination fees and closing costs for them a little higher.

How to find a bank statement mortgage

If you want to apply for a bank statement mortgage, start by contacting your personal banker. If they do not specialize in this type of loan, ask your realtor to give you a recommendation for some mortgage brokers who will write these types of loans.

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I use data and technology to help Millennials navigate the ins-and-outs of buying or selling a home in today's market. From appraisals to mortgages to zoning, I cover it all with the goal to teach others. Connect with me on social via the icons above.

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