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Bank Statement Loans Explained

A bank statement loan is a non-QM mortgage product that uses 12 or 24 months of bank statements instead of tax returns to verify income. Designed for self-employed borrowers whose tax deductions reduce their qualifying income on paper, these loans calculate income by analyzing deposits and applying an expense factor to estimate net earnings.

Key Takeaways

  • Bank statement loans use deposit history rather than tax returns to determine qualifying income, making them accessible to self-employed borrowers with high write-offs.
  • Most programs require either 12 or 24 months of consecutive bank statements, with 24-month programs sometimes offering better terms.
  • An expense factor (typically 50% for business accounts) is applied to total deposits to estimate net income after business costs.
  • Interest rates on bank statement loans are generally higher than conventional mortgage rates, often by 1-3 percentage points .
  • Minimum credit score requirements are typically higher than conventional programs, commonly 660-700 or above .
  • Down payment requirements usually start at 10-20%, with lower rates available for larger down payments.

How It Works

The Expense Factor Explained

The expense factor is the defining mechanism of bank statement loan underwriting. Because bank deposits include both revenue and pass-through funds, lenders apply a percentage reduction to total deposits to estimate the borrower’s actual net income. For business bank accounts, the standard expense factor is often 50%, meaning the lender assumes that half of all deposits go toward business expenses. For personal bank accounts, the expense factor is typically lower, around 30-40%, since personal account deposits are more likely to represent actual income rather than gross business receipts .

Some lenders allow the borrower to provide documentation (such as a CPA letter) to justify a lower expense factor if the business genuinely operates with lower overhead. A consulting firm with minimal expenses might successfully argue for a 30% expense factor on business deposits, while a construction company with high material costs might face a 60% or higher factor. The expense factor directly affects qualifying income: lower factor means higher qualifying income.

12-Month vs. 24-Month Statement Programs

Lenders offer both 12-month and 24-month bank statement programs, and the choice affects both qualification and pricing. A 12-month program reviews one year of consecutive statements and is simpler to document, but may carry a slightly higher rate or require a larger down payment. A 24-month program provides the lender with a longer view of income consistency, which may result in marginally better terms.

For the income calculation, the lender totals all qualifying deposits over the statement period, applies the expense factor, and divides by the number of months. If a borrower’s business account shows $480,000 in qualifying deposits over 24 months and the expense factor is 50%, the qualifying monthly income would be: $480,000 x 0.50 / 24 = $10,000 per month.

Not all deposits qualify. Lenders exclude transfers between the borrower’s own accounts, loan proceeds, gifts (unless documented), and other non-recurring or non-income deposits. Large deposits that are inconsistent with the borrower’s normal pattern typically require explanation and sourcing.

Who Bank Statement Loans Are Designed For

The primary market for bank statement loans consists of self-employed borrowers who have been in business for at least two years and have strong cash flow that is not reflected on their tax returns due to legitimate business deductions. Common candidates include business owners in cash-intensive industries, freelancers and independent consultants, gig economy participants with multiple income streams, and real estate investors whose rental income reporting reduces their taxable earnings.

Bank statement loans are not intended as a workaround for borrowers who simply cannot document income through any means. Lenders still verify business existence, require a minimum credit score, and assess the borrower’s overall financial profile. The program provides an alternative documentation path, not a reduction in underwriting standards.

Pricing and Trade-Offs

Because bank statement loans carry more risk for the lender (no agency guarantee, less standardized income documentation), they are priced accordingly. Interest rates typically run 1 to 3 percentage points above comparable conventional rates, though the spread varies by lender, credit score, down payment, and loan amount. Borrowers with credit scores above 740 and down payments of 25% or more generally receive the most competitive non-QM pricing.

Prepayment penalties are more common in bank statement loan programs than in conventional mortgages. Some programs include a prepayment penalty for the first two or three years of the loan. Borrowers should confirm prepayment terms before committing, particularly if they intend to refinance into a conventional loan once their tax return situation changes.

Related topics include self-employed income calculation, 1-year vs 2-year tax return mortgages, 1099 income mortgage rules, profit & loss statements for mortgage qualification, debt-to-income ratio explained (dti), and common income mistakes that cause mortgage denials.

Key Factors

Factors relevant to Bank Statement Loans Explained
Factor Description Typical Range
Statement Period The number of months of bank statements required. Longer periods provide more income data and may result in better terms. 12 months or 24 months of consecutive statements. Some lenders offer both options with different pricing.
Expense Factor The percentage of deposits assumed to go toward business expenses. Applied to total qualifying deposits to estimate net income. Business accounts: 50% standard (range 30-60%). Personal accounts: 30-40% .
Minimum Credit Score The lowest credit score accepted by the program. Higher scores generally result in better interest rates and lower down payment requirements. Minimum 620-700 depending on lender and program. Most competitive terms at 720+ .
Down Payment / Equity The minimum down payment required, which is typically higher than conventional loans. Larger down payments improve pricing. 10-25% minimum down payment. Best rates at 25-30% or more equity .
Maximum Loan Amount Bank statement programs may have maximum loan limits that differ from conventional conforming limits. Up to $2-3 million at some lenders. Jumbo bank statement loans are available but with stricter requirements .

Examples

Restaurant Owner Using Business Bank Statements

Scenario: A restaurant owner has been in business for six years. Her Schedule C shows $58,000 in net income due to high cost-of-goods and depreciation on kitchen equipment. Her business bank account shows $720,000 in qualifying deposits over 24 months. The lender applies a 50% expense factor.
Outcome: Qualifying monthly income: $720,000 x 0.50 / 24 = $15,000 per month. This is significantly higher than the $4,833/month that would result from her tax returns ($58,000 / 12). The bank statement approach captures actual cash flow that her tax strategy obscures.

Freelance Consultant Using Personal Bank Statements

Scenario: A freelance technology consultant deposits all client payments into a personal checking account. Over 12 months, qualifying deposits total $195,000. The lender applies a 35% expense factor because the borrower operates a low-overhead service business and provides a CPA letter confirming minimal business expenses.
Outcome: Qualifying monthly income: $195,000 x 0.65 / 12 = $10,563 per month. The lower expense factor, justified by the CPA letter, results in a higher qualifying income than the standard 50% factor would produce ($8,125/month).

Comparing Bank Statement vs. Tax Return Qualification

Scenario: A landscaping business owner wants to purchase a home. Tax returns show $52,000 net income (after $85,000 in deductions including vehicle depreciation, equipment, and fuel). Business bank statements show $340,000 in deposits over 24 months with a 50% expense factor.
Outcome: Tax return path: $52,000 / 12 = $4,333/month qualifying income. Bank statement path: $340,000 x 0.50 / 24 = $7,083/month qualifying income. The bank statement approach qualifies the borrower for approximately 63% more purchasing power, but at a higher interest rate.

Common Mistakes to Avoid

  • Commingling personal and business funds across accounts

    Lenders review bank statements line by line. When personal expenses are paid from a business account or business income is deposited into a personal account without clear separation, the underwriter may exclude deposits they cannot verify as income. Maintaining separate accounts with clear transaction patterns simplifies the review.

  • Failing to account for the expense factor when estimating buying power

    Borrowers who see $300,000 in annual deposits may assume they qualify based on the full amount. After a 50% expense factor, their qualifying income is $150,000. Realistic expectations require understanding that the lender will discount total deposits significantly.

  • Not comparing the total cost against conventional loan options

    The higher interest rate and potential prepayment penalties of a bank statement loan can add tens of thousands of dollars over the life of the loan compared to a conventional mortgage. Borrowers should calculate whether adjusting their tax filing strategy to qualify conventionally would be less expensive in the long run.

  • Overlooking large deposit documentation requirements

    Deposits that are significantly larger than the borrower's typical pattern require explanation and paper trail documentation. Unexplained large deposits may be excluded from the income calculation or cause delays. Borrowers should be prepared to explain and source any deposit that stands out from their normal activity.

Documents You May Need

  • 12 or 24 months of consecutive personal or business bank statements (all pages)
  • Business license, articles of incorporation, or DBA registration
  • CPA letter confirming self-employment status and business type (often required)
  • Two months of asset statements for reserves verification
  • Valid government-issued identification
  • Signed borrower authorization for bank verification (Form 4506-C or lender equivalent)

Frequently Asked Questions

What is a bank statement loan?
A bank statement loan is a non-qualified mortgage that uses 12 or 24 months of bank statements instead of tax returns to verify income. It is designed for self-employed borrowers whose tax returns do not fully reflect their cash flow due to business deductions. The lender analyzes deposit patterns and applies an expense factor to calculate qualifying income.
What is the expense factor and how does it affect my qualification?
The expense factor is a percentage the lender applies to your total qualifying deposits to estimate your net income after business expenses. A 50% expense factor on $500,000 in deposits means the lender considers $250,000 as your income. Lower expense factors result in higher qualifying income, and some lenders allow a CPA letter to justify a reduced factor for low-overhead businesses.
Are bank statement loan interest rates higher than conventional rates?
Yes. Because bank statement loans are non-QM products without government agency backing, they carry higher risk for the lender and are priced accordingly. Rates are typically 1 to 3 percentage points above conventional rates for comparable loan amounts and terms, though the exact spread depends on credit score, down payment, and the specific lender .
Can I use personal bank statements instead of business statements?
Many lenders allow either personal or business bank statements, and some allow a combination. Personal statements typically have a lower expense factor applied (30-40% vs. 50% for business accounts) because personal deposits are assumed to more closely represent actual income. The choice depends on where the borrower's income is deposited.
Do I still need good credit for a bank statement loan?
Yes. While documentation requirements differ from conventional loans, credit score standards are typically equal to or higher than conventional minimums. Most bank statement programs require a minimum score of 660-700, and borrowers with scores below 700 may face significantly higher rates and larger down payment requirements .
How long do I need to be self-employed to qualify?
Most bank statement lenders require at least two years of self-employment history, documented by business license, CPA letter, or other evidence of continuous business operation. Some lenders may accept one year with compensating factors such as a higher down payment or credit score, but two years is the industry standard .
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