A Flexible Mortgage Option for Self-Employed Borrowers

Being self-employed shouldn't mean that buying a home has to be complicated.

If you're a business owner, independent contractor, freelancer, consultant, or other self-employed professional, your tax returns may not always tell the full story of your financial situation. Legitimate business deductions can reduce your taxable income, which may also reduce the income a traditional mortgage program can use to qualify you.

A Bank Statement Loan provides another option.

Instead of relying primarily on traditional income documentation such as W-2s, pay stubs, or tax returns, a bank statement loan can use the deposits shown on your personal or business bank statements to determine qualifying income.

Who Are Bank Statement Loans Designed For?

Bank statement programs are commonly designed for self-employed borrowers such as:

• Business owners

• Independent contractors

• Freelancers

• Consultants

• Real estate professionals

• Commission-based professionals

• 1099 earners

• Entrepreneurs and other self-employed individuals

These programs can be especially helpful when your business produces strong and consistent cash flow, but your taxable income is reduced by legitimate business expenses and deductions.

How Does a Bank Statement Loan Work?

Depending on the loan program, the lender typically reviews 12 or 24 months of personal or business bank statements.

Rather than calculating income solely from your tax returns, the lender reviews eligible recurring deposits to estimate your monthly qualifying income.

The basic process looks like this:

1. Review your bank statements

The lender reviews the required period of personal or business bank statements.

2. Identify qualifying deposits

Deposits that represent actual business or self-employment income may be included. Transfers between accounts, loan proceeds, refunds, and other deposits that do not represent income generally are not counted.

3. Determine your average monthly deposits

Eligible deposits are totaled and averaged over the applicable 12- or 24-month period.

4. Account for business expenses

When business bank statements are used, the lender generally applies an expense factor to account for the costs associated with operating the business.

5. Determine qualifying income

The resulting monthly income is then used along with your credit, existing debts, assets, down payment, property, and other underwriting requirements to determine whether you qualify.

Example of How Bank Statement Income May Be Calculated

Suppose a self-employed business owner has:

12 months of eligible business deposits: $360,000

Average monthly deposits:

$360,000 ÷ 12 = $30,000 per month

For illustration, assume the lender determines that 50% of the business's gross deposits represent business expenses.

The remaining 50% could be considered for qualifying income:

$30,000 × 50% = $15,000 in monthly qualifying income

The lender could therefore use approximately $15,000 per month as qualifying income, subject to the specific loan program and underwriting guidelines.

This is only an example. Expense factors and income calculations vary by lender, program, type of business, ownership percentage, and the borrower's individual circumstances.

Personal vs. Business Bank Statements

Personal Bank Statements

Some programs allow qualifying income to be calculated using deposits into your personal bank account.

Because business expenses may already have been paid before income reaches the personal account, qualifying deposits may receive different treatment than deposits into a business operating account.

The lender will still review the source and consistency of deposits and remove transfers or other deposits that don't represent actual income.

Business Bank Statements

Business bank statement programs use deposits made into your business accounts.

Because gross business revenue is not the same as personal income, the lender typically applies an expense factor to estimate the portion of the business's revenue available as qualifying income.

For example, a lender using a 50% expense factor would generally consider 50% of eligible business deposits before accounting for other applicable requirements.

Depending on the program, a different expense ratio may be considered when supported by appropriate third-party documentation, such as documentation from a qualified tax professional or an acceptable profit-and-loss statement.

12-Month vs. 24-Month Bank Statement Programs

Depending on the lender and program, you may have the option to qualify using either 12 months or 24 months of bank statements.

A 12-month program may be helpful for a business whose income has recently increased, while a 24-month program provides a longer history that may better demonstrate consistent or seasonal business income.

The best option depends on your income history and the guidelines of the available loan programs.

Do Bank Statement Loans Require Tax Returns?

Bank statement programs are specifically designed to provide an alternative method of documenting qualifying income.

Depending on the program, personal or business bank statements may be used to calculate income without using traditional tax-return income calculations.

However, a bank statement loan is not a no-documentation or stated-income loan. The lender still verifies your financial profile and may require documentation relating to your business, assets, credit, property, and source of funds.

What Else Does the Lender Consider?

Qualifying for a bank statement loan isn't based on deposits alone.

The lender may also evaluate:

• Credit history and credit score

• Down payment or loan-to-value ratio

• Debt-to-income ratio

• Mortgage payment history

• Cash reserves

• Length of self-employment

• Business ownership percentage

• Property type and occupancy

• Loan amount

• Consistency and source of deposits

• Overall borrower financial profile

Requirements vary significantly between lenders and loan programs.

Why Work With a Mortgage Broker for a Bank Statement Loan?

Bank statement loan guidelines can vary considerably from one lender to another.

One lender may calculate your business income differently from another. Expense factors, required bank statement periods, credit requirements, down payment requirements, reserve requirements, and loan limits may also differ.

As a mortgage broker, I can review your financial situation and compare available programs from multiple lending sources to help identify a loan structure that fits your circumstances.

The goal isn't simply to find a loan — it's to understand how your income should be presented and which available program makes sense for your financial profile.

Let's Review Your Options

If you're self-employed and have been told that your tax returns don't show enough income to qualify for the home you want, a bank statement loan may provide another option.

We can review your bank statements, discuss how your income may be calculated, and explore available mortgage programs based on your individual financial situation.

Contact Faisaloans to discuss your Bank Statement Loan options.

Bank statement loan programs are subject to lender guidelines, underwriting approval, credit requirements, property requirements, loan-to-value limitations, and other eligibility requirements. Program availability and terms are subject to change. This information is for general educational purposes and is not a commitment to lend or a guarantee of qualification.

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Expertise in residential mortgages, financial planning and commercial loans.

Contact

Faisal Momin

713-518-5761

faisal.m@matadorlending.com

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