Every deduction that lowered your tax bill also lowered the income a lender will count. Say you brought in $340,000 last year and wrote off enough in equipment, mileage, and depreciation that your return shows $71,000. A regular lender sees a $71,000 borrower. That is why most self-employed buyers get turned down, and it usually has nothing to do with their credit or savings.
A bank statement loan works differently. Instead of looking at your tax return, the lender looks at the money coming into your accounts. It falls outside the standard mortgage rules, so guidelines change from one lender to the next. That last part is often what decides whether you get approved.
How Lenders Turn Your Deposits Into Income
The lender pulls 12 or 24 months of statements, adds up your deposits, and divides by the number of months. That gives them your average monthly income. Then they apply something called an expense factor, and this is the step that makes or breaks the file.
If you use a business account, the lender assumes part of that money went to running your business, so they subtract a chunk before doing the math. Fifty percent is a common starting point. That means $40,000 a month in deposits counts as $20,000. Some lenders will lower that to 20 or 30 percent if your CPA writes a letter or you provide a profit and loss statement showing what you actually spend. If you use a personal account, deposits usually count in full, since that money already cleared your business expenses.
The gap between a 50 percent factor and a 25 percent factor is huge. On the same statements, it can be the difference between qualifying for $400,000 and qualifying for $600,000. We work with several lenders instead of just one, so we can compare those numbers before we submit rather than after you get a denial.
Not everything in your account counts as income. Underwriters take out transfers between your own accounts, one-time deposits nobody can explain, loan money, and gifts. Steady deposits help you more than big ones. A single large deposit usually gets removed instead of averaged in.
What You Will Need to Provide
- Twelve or 24 months of statements, every page, including the ones that look blank.
- Proof you have been self-employed for at least two years, usually a business license or a CPA letter.
- Sometimes a profit and loss statement, especially if you want that lower expense factor. If you own part of a business rather than all of it, you will need to document your share, because your deposits get counted the same way.
Twelve-month programs cost a little more, but they help if your most recent year looks much better than the year before.
How This Compares to a Regular Mortgage
Bank statement loan |
Regular mortgage |
|
Income based on |
Deposits, minus expenses |
Net income after deductions |
Tax returns |
Not needed |
Two years required |
Down payment |
10 to 20 percent |
3 to 20 percent |
Credit score |
Usually 620 to 660 |
Usually 620 |
Savings after closing |
3 to 6 months of payments |
0 to 2 months |
Rate |
Higher |
Lower |
Mortgage insurance |
Usually none |
Required under 20 percent down |
Skipping mortgage insurance makes up for part of the higher rate. Run both through the mortgage payment calculator before you decide.
Plenty of people who think they need this loan actually do not. If your write-offs are small, a regular mortgage will cost you less, and we would rather tell you that now than put you in the more expensive loan. You can also look through the various loan programs we offer.
How to Set Yourself Up for Approval
- Stop shuffling money between your accounts before you apply. Every transfer looks like a deposit, and the underwriter has to pull each one back out. Statements full of transfers make your income look inflated.
- Put your business income into one account. When deposits are spread across three accounts, the averaging gets messy, and the lender starts asking questions.
- Ask your CPA for that letter early. It costs almost nothing, and it directly affects your expense factor.
- Watch your savings. Most of these loans want three to six months of payments in the bank after you close, and people focused on the down payment forget about it. The affordability calculator helps you plan for both.
Questions We Get a Lot
Is it hard to get approved?
Credit and savings trip people up more than income does. Most denials we see come from not enough money in reserve, or deposits nobody can trace.
How much do I need to put down?
Usually 10 to 20 percent. Better credit and more savings push you toward the lower end.
Do lenders really want three months of statements?
Regular lenders often ask for two or three months just to confirm you have the cash, but that is a different thing. Bank statement loans use 12 or 24 months to actually calculate your income.
Is it worth it?
If your deductions are big enough that your tax return will not support the payment, yes. If they are not, a regular mortgage costs less. We can run both and show you the difference.
Want to see where you stand? Send us 12 months of statements, and we will work out what you qualify for under a few different lenders before you commit to anything. Apply in four steps or set up a call today!
