For the self-employed
Bank Statement Loans
Your tax returns are built to lower your taxes. That's also why they make you look smaller to a lender. A bank statement loan qualifies you on what actually hits your account.
Here's a conversation I had more times than I can count at Chase. A contractor or a small-business owner sits down. The business is doing well. The deposits are real. Then we pull the tax returns, and after depreciation, the truck, the home office and every other legitimate write-off, the income on page one is a fraction of what they actually earn. The bank's answer was usually no.
That wasn't the borrower's fault. It was the product. A bank qualifies you the way its guidelines say to, and for a lot of self-employed people, those guidelines only read the tax return. As a broker, I have options the bank didn't.
Why tax returns work against you
Your CPA's job is to lower your taxable income. They're good at it. Every write-off that saves you money in April also lowers the income a conventional lender will count.
Illustration: a Placentia electrical contractor deposits $22,000 a month through the business. After expenses, depreciation on two work vans and other write-offs, the tax return shows net income of about $6,000 a month. A conventional lender qualifies them on the $6,000. A bank statement lender starts from the deposits.
Same person. Same business. A very different answer on how much house they can buy.
How a bank statement loan works
Instead of tax returns, the lender reviews your bank statements to figure your income.
12 months or 24 months
Most lenders let you choose between 12 and 24 months of statements. Twelve months helps if your business has grown recently and last year's numbers look better than the year before. Twenty-four months smooths out a bumpy year. I usually run both to see which one gives the stronger result.
Personal or business statements
- Personal statements. If your business pays you into your personal account, the lender can count those deposits, often without applying a big expense deduction.
- Business statements. If most money flows through a business account, the lender counts business deposits and then applies an expense factor.
The expense factor
The expense factor is the lender's estimate of how much of your deposits go to running the business. It's a percentage taken off the top. Lenders set standard factors by business type, and some let a CPA or tax preparer document your actual expense ratio instead. If you run a lean operation, like a consultant or a realtor with low overhead, a documented lower ratio can make a real difference.
Lenders also look for deposits that don't count as income, such as transfers between your own accounts or a one-time loan. Clean statements make for a faster file.
Other ways to qualify without tax returns
Bank statements aren't the only route.
- P&L-only loans. Some lenders qualify you on a profit-and-loss statement prepared or signed by a CPA or licensed tax preparer, sometimes with a couple of months of statements to back it up.
- 1099-only loans. If you're paid as an independent contractor, some lenders qualify you on your 1099s instead of full tax returns.
- Asset depletion. If you have significant savings or investments but irregular income, some lenders turn those assets into a monthly qualifying income figure. It's useful for early retirees and business owners who've recently sold.
Each one has its own lender list and its own rules. That's the point of shopping.
Who this fits
The self-employed borrowers I see most in North Orange County:
- Contractors and trades. General contractors, electricians, plumbers, landscapers. High deposits, heavy write-offs.
- Realtors and loan officers. Commission-based, often paid as 1099 contractors, with income that moves with the market.
- Small-business owners. Restaurants, salons, shops, e-commerce, medical and dental practices.
- Consultants and freelancers. Low overhead, often a good fit for a lower documented expense ratio.
- Commission earners who file as self-employed or have a big share of variable income.
Sometimes the answer is that you don't need this at all. If your returns show enough income, a conventional loan usually costs less, and I'll tell you that first.
The tradeoffs
Bank statement loans are non-QM loans, which means they fall outside the standard rules that conventional and government loans follow. That flexibility has a cost:
- Pricing is usually higher than a comparable conventional loan.
- A bigger down payment is often required.
- Lenders usually want more cash reserves after closing.
- Some carry a prepayment penalty, especially on investment property.
For many self-employed buyers, the tradeoff is worth it. It's the difference between buying now and waiting two more years to show more income on paper. For others, the smarter move is to adjust how they file for a year or two and go conventional later. Your CPA should be part of that decision. Once your returns catch up, we can look at a rate-and-term refinance into a conventional loan.
How I shop non-QM lenders
Non-QM guidelines vary more from lender to lender than almost any other part of the mortgage world. One lender uses a lower expense factor for your type of business. Another allows a higher loan amount. Another handles a recent business start better. Another accepts a CPA letter the next one won't.
At Chase, I had one set of guidelines. Now I compare across 175+ lenders and show you the side-by-side: how each one calculates your income, what it needs from you, and what it costs.
Ways to use it
- Buy a home. A bank statement loan can fund a primary home, a second home, and in many cases an investment property. For the full picture on buying, see home purchase loans in Orange County.
- Refinance. Move out of a loan that no longer fits, or off a high-cost loan once your file is stronger.
- Take cash out. Many lenders allow a cash-out refinance on a bank statement loan. Compare it to a standard cash-out refinance if your returns now support one.
- Buying a rental? If the property's rent can carry the payment, a DSCR loan for investors may be simpler, since it qualifies the property instead of you.
Where I work
I'm in Yorba Linda and work with self-employed borrowers across North Orange County, all of California, and the other states where I'm licensed.
Let's look at your numbers
Tell me roughly what you deposit each month, whether it flows through a personal or business account, and what you're trying to buy or refinance. I'll tell you which way of qualifying gets you the most room, and whether conventional still wins. Call or text (714) 713-3133 or book 15 minutes.
Questions people ask
How many months of bank statements do I need?
Usually 12 or 24 months, of either personal or business statements. Twelve months can work if your recent income is stronger. Twenty-four can help if your income swings from year to year. I look at both before we pick.
What is an expense factor?
When you use business bank statements, the lender assumes part of your deposits go to business costs. It applies an expense factor to your deposits to estimate your income. Some lenders let a CPA or tax preparer document your actual expense ratio instead, which can help if your business runs lean.
Do bank statement loans cost more than conventional loans?
Usually, yes. They're non-QM loans, so pricing tends to be higher and the down payment is often larger. The tradeoff is that you can qualify on your real cash flow. I show you the numbers next to a conventional loan when you have a choice.
Can I use a bank statement loan to refinance?
Yes. Many lenders offer bank statement loans for rate-and-term refinances and cash-out refinances, as well as purchases. The rules on cash-out amounts and property types vary by lender.
I'm a 1099 contractor, not a business owner. Is there an option for me?
Yes. Some lenders offer 1099-only loans that qualify you on your 1099 income without full tax returns. If you're a W-2 employee with commission income, we'd usually start with a conventional loan and compare.
Let’s look at your numbers
Fifteen minutes. Your real numbers. No pressure.
Call or text my cell, or book a time. You’ll get a written comparison with real terms and an APR on every option, and if your current deal already wins, I’ll tell you.