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How does a bank statement loan work?

August 25, 2020
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by Christian Perez
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Sept. 20, 2020
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Last updated: August 5, 2022

The information on this page is provided for the benefit of Mortgage Professionals and not intended for Consumers or the general public.

bank statement loan is a mortgage for which the underwriter uses the borrower’s bank statements to verify and evaluate income.

Bank statement loans are designed for borrowers who are not able to document their income using pay stubs, tax returns and other income verification documents required for a traditional mortgage. The bank statements provided with the loan application must be consecutive and cover the 12 to 24 months (depending on the loan program) immediately prior to the application.

Here is a closer look at what bank statement loans are and who they can benefit.

What is a bank statement loan?

A bank statement loan is an alternative to traditional mortgage products. These loans make it possible to gauge a buyer’s ability to repay a loan based on their bank statements and banking history in place of income that’s reported on W-2’s, pay stubs or tax returns.

Some creditworthy borrowers who don’t qualify for traditional mortgages may qualify for a bank statement loan instead. This type of loan may be an option for self-employed clients.

Candidates for bank statement loans may include small business owners and self-employed individuals.

How do bank statement loans work?

Bank statement loans are not traditional mortgages. For traditional mortgage loans, the applicant provides standard documentation to verify income. That includes two years’ tax returns and W2 statements, 2-3 months’ bank statements, and at least 30 days’ worth of pay stubs. Small business owners and self-employed individuals are often unable to satisfy these documentation requirements.

A bank statement loan requires less documentation. The borrower’s ability to repay is based on an analysis of the money going into and out of his or her bank statement each month over a period of time. Business bank account statements are often used, but this income can also be verified based on personal bank statements. This flexibility accommodates, for example, sole proprietors who do not maintain separate business and personal accounts.

At Quontic, 12 consecutive months of bank statements are required. Borrowers may apply using personal or business bank statements. An applicant using business bank statements may also be asked to provide personal account statements to which funds are transferred from the business account. An underwriter will validate the statements.

Who can use a bank statement loan?

Being self-employed can add a wrinkle to the mortgage process because of the income verification requirements for a traditional mortgage. Someone who’s been a business owner for less than two years, for example, or a gig worker whose income ebbs and flows may run into more challenges than other borrowers when it comes time to document income.

A bank statement loan may be a good option for applicants who are not able to qualify for other types of loans. At Quontic, this program is specially designed for applicants who miss the FICO score cutoff for the CDL Lite Doc loan programs (owner-occupied only).

Bank statement loans may be appropriate for a variety of borrowers, including those with credit score issues or uneven income, as deposits are averaged. They may work for people with traditional 9 to 5 jobs or not-so-traditional employment.

Bank statement loans may help to fill funding gaps for buyers who may not be able to get approved for other loans.

Bank statement loans are one of many non-QM options

While bank statement loans can help certain buyers secure a mortgage, it’s important to remember that they’re just one loan product. In many cases, borrowers may be qualified for other types of loans.

Quontic’s owner-occupied and Investor Lite Doc Loans, for example, may be used to purchase residential or investment properties. These loans don’t require W-2s or tax returns; instead, our underwriters verify income for self-employed buyers based on CPA/Accountant prepared profit and loss statements and the current month bank statement. For salaried buyers, the focus is on current income.

Whether it’s for a primary residence or an investment property, having more loan options is a good thing. A full menu of options helps brokers identify the best mortgage option for each client.

The end goal is to help your client find the right mortgage loan for their situation. If you’re interested in learning more about Bank Statement or Lite Doc loan options, contact Quontic today.

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