What Is a Bank Statement Loan and How Does It Work?

A bank statement loan lets you qualify for a mortgage on your deposits instead of your tax returns. I take 12 months of your bank statements, average the deposits, and use that number as your income.

I do this every week, and the reason it exists is simple. Your CPA’s job is to lower your taxable income. My job, when I’m underwriting a conventional loan, is to measure it. Those two jobs fight each other. A bank statement loan is the program for the business owner whose bank account looks a lot better than the tax return does.

What is a bank statement loan, in plain English?

It’s a mortgage that uses 12 months of personal or business bank statements to prove your income. Most lenders call these non-QM (non-traditional) loans. A Qualified Mortgage, or QM, is the CFPB’s category for a loan with safer features that make it more likely you can afford it. A non-QM (non-traditional) loan sits outside that box. It still has to meet the federal ability-to-repay rule, so the lender still verifies that you can afford the payment. It just uses different documents, deposits instead of tax returns.

Because the lender takes on more risk, in my experience the rate typically runs about 1% to 2% higher than a traditional tax-return loan. Every file is different, and that range moves with the market, so treat it as my experience and not a quote.

How do you calculate income from bank statements?

I add up 12 months of deposits, divide by 12, and apply an expense factor. Personal account deposits generally count at 100%. Business account deposits get reduced, because not every dollar that hits a business account is profit. The factor I use most often is 50%, and HousingWire’s guide to these loans describes the same 50% starting point.

Here’s a hypothetical with simple math. It’s not a program or a payment I’m offering.

• A consultant’s business account takes in $360,000 over 12 months. That averages $30,000 a month.
• At a 50% expense factor, her qualifying income is $15,000 a month.
• Her tax return, after write-offs, shows $96,000 of net profit. That’s $8,000 a month.

Same business, same year, two very different answers. If the program’s top total debt-to-income limit is 50%, her monthly debt capacity on the tax return is $4,000. On the bank statements it’s $7,500. Debt limits vary by program and by file, so use this as a comparison, not a promise.

The edge: I fight the underwriter before I ask you for anything

Most people treat the 50% expense factor as a law of nature. It’s an assumption. The lender doesn’t know your margins, and businesses with heavy payroll or inventory can be assigned a higher factor, up to 70% in some cases.

Here’s how I work. If the standard 50% qualifies you, I don’t need anything extra, so I don’t ask for anything. If the income falls short, I go back to underwriting and make the case. Only if I still need more income do I ask your CPA to state your real expense ratio. In the same hypothetical, a 35% factor on $30,000 a month gives $19,500 of qualifying income instead of $15,000.

Underwriters love to ask for a CPA letter. In my experience, CPAs rarely write them. They worry about being sued by a bank, and they’ve become less willing over the years. A loan officer who treats the letter as step one sends you after something you may never get. An experienced bank statement loan officer pushes back on the condition and clears it another way. That’s a nuance a lot of loan officers who avoid these loans never learn.

Should you start with a bank statement loan?

No. I read your tax returns first, every time, because the cheapest valid option comes first. A conventional loan on your returns usually carries a lower rate. If the returns work, we use them.

Freddie Mac allows a lender to use one year of returns instead of two when the business has been in existence for five years or more, according to Freddie Mac’s income documentation. Most business owners have never heard that, and it’s the route I check first. Fannie Mae also lets lenders add back certain items on a Schedule C, including depreciation, depletion, amortization and business use of the home, which can raise your qualifying income above what you’d guess from the bottom line. My post on how tax write-offs shrink your qualifying income walks through it.

So the order is: read the returns, check conventional and one-year options, look at the add-backs, and only then move to bank statements if the returns don’t get you to the number you need.

Who is a bank statement loan for?

The fit is anyone self-employed with a track record: business owners, franchise owners, 1099 contractors, commission earners, and real estate agents. The common thread is a bank account that tells a stronger story than the return.

In my experience, a few things decide whether the file works. Most programs want two years of self-employment, which you can document with a business license, articles of incorporation or a tax preparer letter. Down payments typically start around 10% on a primary residence, with higher credit scores earning the lower down payments. Reserves of about six months are common. These ranges change with the market and differ by lender, so I treat them as a starting point and run your actual file. You can plug in your own numbers with my bank statement income calculator and see the full program on the bank statement loan page.

Nuances most loan officers miss

Bank statement loans have a lot of small details, and loan officers who avoid them rarely learn the details.

What most people think	What I see	Why it matters
You need a CPA letter first	It’s a last resort. I push back on the underwriter first	CPAs rarely write them, so waiting on one stalls the file
You need 24 months of statements	12 months does the same job in today’s market	It’s the difference between running a half marathon and a full marathon
Rates are always 2% higher	Typically 1% to 2% higher, and sometimes about the same	Compare real quotes, not rules of thumb
Personal and business statements work the same	Personal deposits can count at 100%, but every account holder must be on the loan	Choosing the right account changes your income

A pitfall I see: the account that doesn’t match the business

This is a hypothetical, but it’s a pattern I see a lot.

A contractor operates as “Reyes Builders LLC.” For two years his customers have paid into whatever account was handy. Some checks went into the LLC account, some payments landed in his personal checking, and a few went to an old account he forgot to close. He hands me 12 months of statements from the personal account because it has the most activity.

The application says Reyes Builders LLC. The statements say Michael Reyes. These programs usually allow one business and one account, and the business name on the application has to match the statements exactly. Now the underwriter is asking which deposits are revenue, which are transfers between his own accounts, and which are a friend paying him back. Every deposit he can’t explain comes out of the average, and his income drops.

Pick the account that carries the business, make sure the name matches, and stop mixing personal and business money at least a year before you buy. If that’s already impossible, tell me on day one so I can choose the program around it. I cover more of this in 7 Bank Statement Mistakes That Slow Underwriting.

What to do before you call me

1. Pull 12 months of statements for the account that holds your business income.
2. Mark every deposit that isn’t revenue, such as transfers between your own accounts, loans and refunds.
3. Don’t chase a CPA letter. I only ask for one if the standard expense factor leaves us short on income.
4. Check the business name on your account against the name you’ll put on the application.
5. Dig out your last two tax returns so I can check the cheaper option first.
6. Add up your cash and retirement accounts, because most of these loans want reserves.

I’m a mortgage broker with NEXA Lending, and I work with borrowers in all nine states where I’m licensed (CA, CO, TX, FL, GA, NC, SC, TN, VA). As a broker, I can shop your loan across a wide network of lenders instead of being stuck with one bank’s programs. Send me your returns and 12 months of statements, and I’ll tell you which path fits first. Programs, rates and approval depend on your full file, and individual rates vary.

For the full picture, read my Complete Bank Statement Loan Guide for Self-Employed Borrowers.

Sources: Freddie Mac, Income Calculator FAQ (one year of returns for a business in existence five or more years) (opens in a new tab), Fannie Mae Selling Guide B3-3.3-03, Schedule C add-backs (opens in a new tab), CFPB, What Is a Qualified Mortgage (opens in a new tab), HousingWire, How Bank Statement Loans Work (opens in a new tab).