A guide to bank statements for your mortgage

Are you self-employed? Maybe you work as a freelancer for several clients. If you’re ready to apply for a mortgage, you might need to rely on a bank statement loan, a type of loan designed for homebuyers who don’t have jobs that pay a regular salary.

You’ll have to meet certain mortgage qualifications when you apply for a home loan. Your lender will check your three-digit credit score and verify your income to make sure that you can afford your monthly mortgage payment. 

Mortgage lenders often require borrowers to provide them with copies of their W-2 statements from the last two years. That’s because this tax form lists the money employers pay workers, a key figure for lenders verifying that borrowers can afford their mortgage payments.

If you’re self-employed, though, you won’t receive one of these statements because you don’t have a full-time job that comes with a set salary. Because of that, you might need to apply for a different type of mortgage, a bank statement loan.

What is a bank statement loan? Read on to learn more.

What are bank statement loans?

Bank statement loans make it easier for borrowers who are self-employed or gig workers to qualify for a mortgage. They are also tools that workers can turn to when their income fluctuates from month to month.

With a bank statement loan, you won't have to provide your lender with copies of your tax returns, W-2 statements or pay stubs. Instead, you'll just provide them with copies of your bank statements.

Lenders will review these statements to make sure that you are earning enough to cover your mortgage payment each month, even if you don't hold down a full-time job that pays a regular salary.

How many months of bank statements you’ll need will vary by lender, with many requiring borrowers to provide 12 to 24 months of statements. Lenders ask for a higher number of statements to make sure that the money in your bank account is consistently high enough to cover your new mortgage payment.

Understanding your bank statements

Your bank might send you checking and savings account statements once a month, sending either paper statements in the mail or electronic ones by email. Depending on your preferences, your bank might only make your statements available on your online account, requiring you to log into your account to view them.

Your bank statements show two main activities:

• Deposits. The money that you or others put into your bank account is known as a deposit. Deposits can come from electronic payments made by your freelance clients or by cash deposits that you make. Cashed checks and wire transfers are common sources of deposits, too. Your bank will also deposit the interest that the money in your account earns.
• Withdrawals. Any money that you or others remove from your account is a withdrawal. If you make a purchase with a debit card, get cash from an ATM, or send a transfer, your bank lists these actions as withdrawals on your account.

How being self-employed or working as a freelancer affects applying for a mortgage

It can be more difficult for freelancers or self-employed people to convince lenders that they can afford monthly mortgage payments.

Lenders might worry about the consistency of the income earned by freelancers or self-employed workers. Because these workers don’t receive a set salary each month, their income can fluctuate. Lenders worry that if freelancers have a down month, they might not earn enough dollars to pay their upcoming mortgage payment. That makes self-employed and freelance workers riskier borrowers in the eyes of mortgage lenders.

Maybe you work as a wedding photographer. You might earn a lot of money during summer months when more people are getting married. But your income might drop during the winter when weddings are less common. Lenders want to make sure that you can still afford your mortgage payment during your business’ slower months.

To ease their concerns, lenders will study your bank account statements to make sure that your bank account has for the last 1 – 2 years had enough money in it to cover your new mortgage payment. They’ll also check your credit reports to make sure that you have a history of paying your bills on time. Lenders will pull your three-digit credit score, too, a number that shows how well you’ve handled credit and paid your bills over time.

What to know before you apply for a bank statement loan

A bank statement loan is an example of a nonqualified mortgage, a mortgage loan that doesn’t meet the lending standards set by the Consumer Financial Protection Bureau.

The bureau mandates how lenders must verify the income and debt levels of borrowers. With qualified mortgages, borrowers typically provide such documents as copies of their paycheck stubs, W-2s, income tax returns and bank account statements.

Borrowers who can’t provide all this documentation, such as those applying for bank statement loans, must usually seek a nonqualified mortgage. Freelancers, self-employed workers and gig workers are more likely to qualify for a nonqualified mortgage because lenders can use manual underwriting instead of automated underwriting.

With manual underwriting, lenders can approve or reject loan applications on a case-by-case basis, looking at extenuating factors, such as a high balance in your bank account.

To earn approved for a bank statement mortgage, you’ll typically need to show your lender:

• You have a steady income coming into your bank account each month.
• You’ve built an emergency fund covering from 3 – 6 months of daily living expenses and can cover closing costs.
• Your debt levels are low.
• You have a strong credit score. This varies depending on loan type, but many lenders will require a FICO credit score of at least 620, though some may want a score of at least 700, when applying for a bank statement loan.
• You have a long history of paying your bills on time and you don’t run up your credit card balances.

Your lender also might require that you provide a larger down payment. It varies, but some lenders require that you provide a down payment of at least 10% of your home’s purchase price for these loans.

How to apply for a bank statement loan

When you apply for a bank statement loan, you’ll need to provide your lender with 12 – 24 months of bank account statements. Your lender will review these statements to make sure that you always have enough money in your account to cover your mortgage payment.

Lenders also will review your three credit reports and your three-digit FICO® credit scores. The higher your score, the more likely you are to qualify for a bank statement loan at a lower interest rate.

Your lender might also require that you have worked as a freelancer or that you’ve been self-employed for at least 2 years. That’s to make sure that you have enough experience as a self-employed worker to weather any challenging economic times.

Lenders might also require that you have enough money saved to cover a certain number of mortgage payments. That way, you can make these mortgage payments even if you suffer a temporary dip in income. This will vary, but some lenders might require that you have enough savings to cover 2 – 4 monthly mortgage payments.

Once you submit your paperwork and fill out your loan application, your lender will send your application through the underwriting process. If the underwriter approves your loan, you’ll move to the closing stage to finalize the mortgage and your home purchase.

Why do mortgage lenders require bank statements?

No matter what type of mortgage you are seeking, your lender will want to see at least some bank statements from you. Your lender uses these statements to verify your income, something that helps it determine how much of a mortgage payment you can afford each month.

When you apply for a bank statement loan, you'll need to provide a larger number of monthly account statements, while if you apply for a standard loan, your lender might only require copies of your last 2 bank statements.

Your lender also might want to verify that you keep your business and personal accounts separate. To do this, lenders might request copies of both your business and personal account statements.

Your statements confirm that you can afford your mortgage payments

By studying your statements, your lender can determine that you have enough money coming into your account each month to cover your mortgage payments. Lenders also check your balance to make sure that your account has enough dollars to cover a down payment.

They show you have reserve funds available

It varies, but lenders typically want to make sure that you have enough money leftover in your account after you pay for closing costs, upfront fees and your down payment to cover at least 2 months of mortgage payments. Your bank account statements will give lenders the information they need to verify this.

They prove you can cover your closing costs

Your lender also uses your bank statements to determine whether you have enough money in your account to cover closing costs. These fees charged by your lender and other third-party providers typically run from 3% – 6% of your loan amount. If you are borrowing $300,000, expect to pay closing costs ranging from $9,000 – $18,000.

They prove that your assets are ‘sourced and seasoned’

Your lender checks your bank statements, too, to make sure that your assets are sourced and seasoned. Sourced means that the lender knows where your money is coming from. Seasoned means that all funds have been in your account for a while. It varies, but lenders typically consider funds to be seasoned if they’ve been in your bank account for at least 60 days.

Lenders check this to make sure that your down payment funds aren’t coming from a loan. Because you'd have to pay a loan back, lenders would have to include those monthly payments as part of your debt-to-income ratio, which could mean that you’d qualify for a lower loan amount.

Red flags for underwriters

After you submit your loan application, your lender will start the underwriting process. The job of underwriters is to determine how likely you are to repay your mortgage loan on time. Lenders rely on their underwriting team to help determine whether you qualify for a loan, how large of a loan you qualify for and what interest rate you'll receive.

What red flags might cause underwriters to lower your loan amount or deny your mortgage request?

• Unstable income: If you’re a self-employed borrower, your earnings might rise or fall throughout the year. If you can't maintain a high enough balance each month to cover your mortgage payment and other expenses, your lender might balk at offering you a loan. Offering your bank statements to show that you can maintain a regular balance high enough to pay your bills can be crucial to getting approved.
• Changes in income: If your income has changed drastically in the last 2 months – whether it has risen or fallen significantly – your lender will want to know why. Have an explanation available in writing explaining the reason for this income change and whether it is temporary to help alleviate any concerns from your lender.
• Low savings: Each lender has its own standards for how much you should have in savings, but lenders typically want to see that you have enough savings after you pay for your down payment, closing costs and upfront fees to cover at least 2 months of mortgage payments. They’ll also want to see that you have enough assets to cover your loan's down payment and closing costs without help.
• Large influx of cash: A large deposit in your account might make lenders worry that you’ve taken out a loan for your down payment that isn’t showing up on your credit report.
• Excessive overdrafts: Several overdrafts are a major red flag for mortgage lenders. If lenders see a pattern of overdrafts, they'll worry that you borrow more than you can afford to pay back.

How many bank statements will you need to provide?

Borrowers applying for a traditional mortgage typically need to provide two months of bank account statements, in addition to copies of their most recent paycheck stubs, their last 2 years of income tax returns and last two years of W-2 forms.

If you are applying for a bank statement loan, though, lenders usually require that you provide from 12 – 24 months of bank statements. Lenders ask for a larger number of statements because these loans don’t require that you provide any other documentation, including W-2s or tax returns.

FAQ about bank statement home loans

Have questions about how bank statement loans work? Here are some answers.

Are there alternatives to bank statement loans?

You might be able to qualify for a stated-income loan, also known as a no-doc loan. These loans require you to submit no documents to prove your income. You simply state your income. These loans are risky, so lenders will charge higher interest rates and require a higher down payment. They are also rare. You’ll have to search to find lenders that offer these loans today.

You can also apply for a 1099 loan, a mortgage that uses the income reported on your 1099 forms, the IRS form used to report payments from your freelance clients, to verify that you can afford your new mortgage payments. You’ll typically need to provide your 1099 forms from the last 1 – 2 years to qualify for this loan type.

How do I find my bank statements?

You can find your bank statements through your bank’s or credit union’s website. Log into your account and follow the instructions to print out the number of months of statements that your lender requires. You can also call your financial institution and ask it to mail your statements to you.

What other documents will I need to provide for a bank statement loan?

It varies by lender, but you’ll usually need to provide a copy of your driver’s license, your Social Security number, income statements from your investments and an estimate of your monthly debts.

The bottom line: A bank statement loan be right for you

If you’re self-employed and running your own business or a freelancer, there are still many ways to qualify for a mortgage. Your bank statements can help show lenders that you have the income necessary to afford a monthly mortgage payment. When you can demonstrate that you’ve regularly made a profit from your work, that will go even further in assuring lenders that you are not a risky borrower.

If you’re ready to start your homebuying journey, we can help. We offer several mortgage products that might be the right fit for you, whether you are a freelancer, self-employed business owner or a traditional salaried employee. Start your mortgage application with us today.