Bank statement mortgages for self-employed and contract workers

Craig Berry
Craig Berry
The Mortgage Reports Contributor
February 4, 2022 - 10 min read

Is a bank statement mortgage right for you?

A bank statement mortgage can be helpful if you’re self-employed, and large tax deductions make your income look much smaller than it really is.

By looking at bank statements to determine your cash flow, lenders can qualify you based on your ‘real’ income — rather than the reduced amount they might see listed on your tax returns.

You might be interested in a bank statement mortgage if you’re a business owner, freelancer, contractor, seasonal, or gig worker. If so, here’s what you should know.


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How lenders determine your income

When buying or refinancing a home, there are specific steps to go through.

One step requires documenting your income. That includes savings, retirement, investment balances, and debts.

This can be challenging for self-employed mortgage applicants. These folks often have hard-to-document income and business expenses.

For instance, a self-employed borrower might earn $7,000 a month. But after business write-offs, their tax forms may document an income of only $5,000 a month.

This could reduce their home buying budget by more than $150,000.

Documented monthly income$7,000$5,000
Qualified monthly mortgage payment$2,020$1,300
Qualified home buying budget$443,900$285,700


Loan assumptions: Example assumes a 30-year, fixed-rate mortgage with 3.75% interest and 10% down on a home located in Washington. Your own rate and monthly payments will be different

How to get a mortgage when you’re self-employed or a freelancer

So, you’re self-employed or run a side hustle. You have a strong credit score and a solid financial track record. But you’re having trouble qualifying for a mortgage because you don’t have traditional W2s to document your income.

Fortunately, a bank statement loan program may be an ideal solution.

Here we explain how bank statement loans work and how to find out whether you’ll qualify for one.

What is a bank statement mortgage program?

A bank statement mortgage program allows you to verify your income on a mortgage application using documented bank deposits instead of tax forms.

Traditional mortgage loans use tax returns, W2s, and pay stubs to verify monthly income.

The higher your monthly income, the lower your debt-to-income ratio (DTI), and a lower DTI can justify a higher loan amount.

But providing those traditional employment documents will be impossible for people who don’t have full-time employers. Instead, mortgage applicants may opt for a bank statement loan program.

Using personal bank statements to qualify for a mortgage instead of W2s might be a good loan option if:

  • You don’t have traditional tax documents to verify your total income
  • You have tax documents, but due to write-offs, your income looks smaller than it really is

Once upon a time, stated income loans were a common mortgage solution for borrowers who couldn’t document their full income. But stricter regulations in response to the mortgage crisis of the late 2000s have made stated income loans a thing of the past.

Today, bank statement loans have become more popular because they create less risk for lenders. Borrowers don’t simply “state” their income anymore. With bank statement loans, applicants must document regular monthly deposits in order to qualify for a mortgage loan.

Who should get a bank statement mortgage loan?

If you’re a business owner or an independent contractor without a salaried income, getting qualified for a traditional home loan can be difficult.

A bank statement loan program can help. This type of loan is typically used by:

  • Self-employed applicants
  • Independent contractors
  • Workers with seasonal income
  • Gig workers, side hustlers, or freelancers
  • Other earners with irregular income streams

Self-employed applicants are the most common folks to benefit from bank statement loans. But anyone who wants to go this route to buy a new home, or to refinance an existing loan, can apply.

If you need to document income but don’t have pay stubs and W2s, ask your mortgage broker or lender about underwriting based on personal bank statements.

You may find that mortgage eligibility is easier than you expected.

Types of bank statement loans

Depending on the lender and your specific situation, there are different bank statement loan programs available.

While most lenders require a minimum of 12 months of bank statements, some may require less. Keep in mind that applicants who can provide 24 months of statements may qualify for better rates and terms.

In addition, some lenders may want you to use business bank statements as opposed to personal bank statements.

If you don’t have business bank statements, you may still be able to use your personal statements with those lenders. However, they might use a smaller percentage of your deposits for qualifying purposes.

In some cases, borrowers also may be required to provide a profit and loss statement (P&L) for their business prepared by a tax professional.

Drawbacks of bank statement mortgage loans

Fortunately for homeowners who can’t provide the usual income verification, bank statement loans are becoming increasingly common.

But these are still considered higher risk than traditional mortgages. And that means there’s a trade-off between lenders and borrowers.

The trade-off typically comes in the form of a higher interest rate and higher down payment requirements.

“A more conventional option is that perhaps you file a schedule C,” notes Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “Bank statement loans should be your last option as they are non-QM loans and come with higher rates.”

Bank statement loans typically have a higher interest rate and bigger down payment requirements.

These extra costs offset the risk associated with not being able to show income via traditional methods.

The exact rate and necessary down payment for bank statement loans are usually based on credit scores.

Remember, rates and terms vary a lot by company. Talk with more than one mortgage lender to see who has the lowest rates and best terms on the loan you need.

How to find a bank statement mortgage loans

Bank statement mortgages are categorized as “non-qualified mortgages” (Non-QM) since they don’t conform to conforming loan standards set by Fannie Mae and Freddie Mac.

Since they’re considered to be Non-QM, not all lenders offer bank statement mortgages. In fact, many banks and credit unions choose not to offer these types of loans.

You might have better luck with a company that does only mortgage lending.

If you don’t qualify for traditional mortgage financing, contact several lenders to determine if they offer bank statement programs or other loan programs for self-employed applicants.

Be sure to ask about the lender’s requirements for personal versus business statements. You should also find out how many months of bank statements the lender will require.

And don’t forget to ask about down payment requirements and interest rates.

Bank statement loan program alternatives

Bank statement loans are not the only mortgage options for the self-employed. In fact, a more common choice is to qualify for a standard loan program and use tax returns to verify income, instead of W2s.

Conventional loans

For self-employed borrowers with a good credit score and down payment of at least 3-5%, a conventional loan may be the most affordable option.

Fannie Mae and Freddie Mac qualify eligible borrowers with either a minimum of two years of self-employment, or with one year of self-employment and a documented employment history of two years earning similar income.

In addition, you’ll need:

  • 620 minimum credit score
  • 3% minimum down payment
  • Debt-to-income ratio below 45%, in most cases
  • Loan amount within conforming loan limits

FHA loans

FHA mortgages are backed by the Federal Housing Administration and are often good options for first-time home buyers or borrowers with low credit scores.

Similar to a conforming loan’s income verification guidelines, FHA requires a two-year self-employment history, or one year of self employment and two years in a similar role with comparable income.

Additionally, the FHA may consider only one year in a similar role and one year of training or education as a substitute for a two-year history.

To qualify, you’ll need:

  • 580 credit score minimum
  • 3.5% minimum down payment
  • Debt-to-income ratio below 50%, in most cases
  • Use property as primary residence
  • Loan amount within FHA loan limits

VA loans

VA mortgages are backed by the Department of Veterans affairs, and they are designed for veterans, service members, and some surviving spouses.

Borrowers need a minimum of two years of self-employment history, or one year plus two years in a similar role.

Additional requirements include:

  • 580-620 credit score minimum, varies by lender
  • 0% down payment minimum
  • Eligible service history

USDA loans

USDA mortgages are guaranteed by the U.S. Department of Agriculture. They feature no down payment requirement and lower-than-market rates.

Self-employed applicants need to prove a two-year history, or one year of self employment and two prior years in a similar role with comparable income.

Other guidelines include:

  • 640 credit score minimum
  • 0% minimum down payment
  • Income no higher than 15% above the median area income
  • Property must be a single-family residence
  • Loan term must be 30-year, fixed-rate

Bank statement mortgage FAQ

How does a bank statement mortgage work?

Bank statement mortgage programs use your bank statements to document your income rather than depending on pay stubs or W2s — forms most self-employed borrowers don’t have.

Are bank statement mortgages good?

A bank statement mortgage might be a good option if you’re self-employed and your tax write-offs make your income look much smaller than it really is. However, these loans have higher interest rates. So it’s typically best to stick with a conforming loan or government-backed loan if you can qualify via one of those programs.

How much down payment is required for a bank statement mortgage?

Since they’re non-conforming loans, your lender may require a higher down payment, such as 10 or 20 percent. Lenders may want to see a higher credit score than the 620 conventional loans usually require. In this sense, bank statement loans resemble jumbo loans.

Can I use a bank statement loan on a second home?

Yes, this kind of borrowing works for primary residences along with second homes, vacation homes, or investment properties.

Do bank statement loans work for refinancing?

Yes, bank statement loan programs work for refinance loans, including cash-out refinances for borrowers who have enough home equity to meet lending requirements.

Do bank statement loans work for FHA loans?

No, FHA does not offer a bank statement loan. Instead, the lender may use tax transcripts to verify two years of income for self-employed borrowers.

Do bank statement loans require PMI?

Yes, unless you put down 20 percent or more. If you can’t make a 20 percent down payment, you can still cancel mortgage insurance later, once your loan-to-value ratio (LTV) reaches 80 percent or lower.

My lender wants both bank statements and W2s. What’s going on?

It’s common for lenders to ask for bank statements even if you’re not using them to document a regular flow of income. If you’re employed and using W2s and pay stubs to show your income, your lender will probably need only two to three months of bank statements — not the 12 to 24 months needed for a bank statement loan.

What are today’s mortgage rates?

Are you self-employed? Do you earn seasonal income? Are you a consultant, promoter, tax-preparer, freelancer, artist or other professional with an irregular income stream?

Regardless if you’re a first-time home buyer or refinancing, a bank statement loan program may be the perfect home loan for you.

Rates and down payment requirements vary from one lender to the next. It’s always good to shop around to find the lowest rate possible.

You can get started on your real estate journey right here.


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