What is a bank statement loan? If you have a non-traditional income source, such as self-employment or gig work, the quick answer might be that it’s the solution to your homebuying problem.
Not everyone makes money in one of the traditional ways. Self-employed people, entrepreneurs, solopreneurs, investors, and others might fall into this category.
The bottom line is that many hard-working homebuyers can’t show their true income potential through traditional means like tax returns, W-2s, etc.
If you are one of these folks, it can be challenging to get approved by a traditional mortgage lender. Does that mean you’ll always be denied the ability to buy a home?
Bank statement loans can be a flexible alternative to traditional mortgages. They enable borrowers to qualify based on their bank statements rather than standard income documentation.
This article will explain what a bank statement loan is and outline its key benefits.
Apply online with Lendistry Home Loans.
What is a bank statement loan?
A bank statement loan is a type of mortgage that lets borrowers use their bank statements rather than traditional income verification methods such as:
- W-2s
- Pay stubs
- Tax returns
Lenders use the deposits shown in the borrower’s bank statements over a specified period, typically 12 to 24 months, to determine their income and financial stability.
Who are bank statement loans the best for?
Bank statement loans are particularly beneficial for:
- Self-employed individuals
- Freelancers and gig economy workers
- Small business owners
- Real estate investors
- Individuals with irregular or seasonal income
What are the key benefits of bank statement loans?
Easier to qualify for than conventional loans
One of the most significant advantages of bank statement loans is the easier qualification process. With bank statement loans, lenders focus on the income deposits in your bank statements, simplifying the approval process.
Traditional mortgages require extensive documentation, including tax returns and pay stubs, which can be challenging for self-employed individuals or those with non-traditional income.
Flexibility for self-employed borrowers
Self-employed borrowers often face difficulties qualifying for traditional mortgages due to the variability and complexity of their income.
Bank statement loans offer a flexible alternative, allowing these borrowers to demonstrate their ability to repay the loan through the funds that flow directly into their accounts.
Accurate reflection of income
When you have non-traditional income, tax returns often distort the true earnings of many self-employed individuals and business owners due to business expenses and deductions.
Bank statement loans allow borrowers to qualify based on their gross income—as reflected in their bank statements. This gives lenders a more accurate representation of their financial situation.
Faster approval and funding
Since there is less paperwork and fewer steps, borrowers often receive approval and funding in a shorter timeframe.
This expedited process can be vital for borrowers who need to secure financing quickly. Real estate investors are a prime example of those who might need to move quickly to secure funding.
No need for tax returns
Tax returns can be complicated affairs.
If you’re dealing with multiple income sources, for example, each with its own quirks and characteristics and requirements for deductions and expenses, it might paint a picture to a traditional lender that your business model is too complex to approve a mortgage.
By sticking to the contents of your bank statements, this loan process circumvents the tax return obstacle entirely, enabling the lender to see directly how much income you have generated.
Competitive loan amounts
Bank statement loans can offer competitive loan amounts, allowing borrowers to finance larger purchases or investments.
Real estate investors and business owners who need substantial funding to support their ventures can particularly benefit from these loans.
Common misconceptions about bank statement loans
While bank statement loans offer numerous benefits, some common misconceptions can cause potential borrowers to hesitate:
Myth 1: Bank statement loans are only for those with poor credit
Reality: Bank statement loans are designed to help individuals with non-traditional income sources, not just those with credit challenges.
Myth 2: Bank statement loans are expensive due to higher interest rates
Reality: While rates can be higher than traditional mortgages, many borrowers find the trade-off worthwhile, given the flexibility and accessibility these loans provide.
Myth 3: The application process for bank statement loans is overly complicated
Reality: For those who keep well-organized financial records, applying for a bank statement loan can be relatively straightforward—in many cases, it’s faster than applying for a conventional loan.
How do bank statement loans compare to traditional mortgages?
Traditional mortgages
- Income verification: Traditional mortgages rely heavily on pay stubs, W-2s, and tax returns for income verification.
- Documentation: These loans typically require extensive documentation, including tax returns, which can be time-consuming to gather and submit.
- Interest rates: Traditional mortgages generally offer lower interest rates, making them a cost-effective option for those who can meet the documentation requirements.
- Approval process: The approval process for traditional mortgages is often longer due to the need for extensive verification of income and financial history.
Bank statement loans
- Income verification: Bank statement loans use bank statements to verify income, offering a more flexible qualification process for those with non-traditional income sources.
- Documentation: These loans require less documentation than traditional mortgages, simplifying the application process.
- Interest rates: While bank statement loans typically have higher interest rates, they provide an alternative for borrowers with non-traditional income.
- Approval process: Bank statement loans offer a faster and more streamlined approval process, making them a convenient option for those who don’t meet traditional lending criteria.
Ready to secure your bank statement loan? Here’s how to start
Bank statement loans can be an excellent way to purchase property as a self-employed borrower.
With easier qualification criteria than conventional loans, flexibility, and quick approval times, these loans can be an excellent choice for many borrowers.
Start your application process by visiting Lendistry Home Loans.
Our dedicated team of bank statement loan experts can help you through the application process and get you the loan you need.