Why Do Self-Employed Borrowers Struggle with Traditional Mortgages?
Self-employed professionals face a fundamental conflict: good tax planning reduces taxable income, but mortgage lenders use tax returns to qualify borrowers. A business owner earning $300,000 annually might show only $80,000 on tax returns after legitimate deductions—not enough to qualify for their desired home.
The Tax Return Trap
Actual Business Income
$300,000/year
After Tax Write-Offs (Tax Return)
$80,000/year
Traditional lenders see $80,000 income → Qualifies for ~$350,000 home
Bank statement lenders see $300,000 deposits → Qualifies for ~$1,200,000 home
Expert Insight: According to Mo Abdel, NMLS #1426884, "I work with business owners daily who earn six figures but can't qualify conventionally. Bank statement loans bridge this gap by looking at actual cash flow, not tax-optimized returns."
How Do Bank Statement Loans Calculate Income?
Income Calculation Formula
Step 1: Total Deposits
Add all deposits from 12 or 24 months of statements
Example: $360,000 over 12 months
Step 2: Remove Non-Income Deposits
Exclude transfers between accounts, loans, one-time gifts, refunds
Example: $360,000 - $30,000 = $330,000
Step 3: Apply Expense Factor
Business accounts: 50% expense factor. Personal: 100% of deposits.
Business Example: $330,000 × 50% = $165,000 annual income
Step 4: Monthly Qualifying Income
$165,000 ÷ 12 = $13,750/month qualifying income
Should I Use Personal or Business Bank Statements?
Personal Bank Statements
Best for sole proprietors, freelancers, and gig workers who deposit income directly to personal accounts.
Advantages
- • 100% of deposits count as income
- • No expense factor deduction
- • Simpler documentation
- • Easier to explain deposit sources
Business Bank Statements
Best for LLC owners, S-Corp shareholders, and business owners with dedicated business accounts.
Considerations
- • Standard 50% expense factor applied
- • Can document actual expenses for lower factor
- • Higher gross deposits may offset factor
- • May combine with personal statements
What Are the Bank Statement Loan Requirements?
| Requirement | Standard Program | Jumbo Program |
|---|---|---|
| Bank Statements | 12 or 24 months | 24 months preferred |
| Minimum Credit Score | 620-660 | 680-700 |
| Down Payment | 10-15% | 15-20% |
| Self-Employment History | 2+ years | 2+ years |
| Maximum DTI | 50% | 45% |
| Reserves Required | 3-6 months | 6-12 months |
| Max Loan Amount | $1,500,000 | $3,000,000+ |
How Do I Apply for a Bank Statement Loan?
- 1
Gather 12-24 Months of Bank Statements
Download complete statements from your bank. Ensure all pages are included with no missing months.
- 2
Document Your Self-Employment
Business license, CPA letter, or 2+ years of business tax returns (to prove history, not income).
- 3
Prepare to Explain Large Deposits
Any deposit over $10,000 or unusual deposits need explanation and documentation (invoices, contracts).
- 4
Submit Application to Wholesale Broker
Mo Abdel shops 100+ wholesale lenders including 20+ bank statement specialists for best rates.
- 5
Underwriting Review (5-7 Business Days)
Manual underwriting takes longer than automated. Expect questions about deposit sources and business operations.
- 6
Approval, Lock Rate, and Close
Once approved, lock your rate and proceed to closing. Typical timeline: 35-45 days total.
Expert Tips for Bank Statement Loan Approval
Keep Deposits Consistent
Regular, consistent deposits are easier to document than sporadic large deposits.
Avoid Overdrafts
NSF fees and overdrafts raise red flags. Keep accounts in positive standing.
Document Large Deposits
Keep invoices, contracts, and receipts for any deposit over $10,000.
Use Business Account If Higher Volume
Even with 50% expense factor, higher business deposits may qualify you for more.
Frequently Asked Questions About Bank Statement Loans
How do bank statement loans calculate income?
Lenders total your deposits over 12 or 24 months, exclude non-income transfers (internal transfers, loans, one-time gifts), then apply an expense factor (typically 50% for business accounts, 100% for personal) to determine your qualifying monthly income.
Can I use personal or business bank statements?
Both are accepted. Personal bank statements typically use 100% of deposits as income. Business bank statements apply a 50% expense factor (industry standard), though some lenders allow documentation of actual expenses to use a lower factor.
What credit score do I need for a bank statement loan?
Most bank statement loan programs require 620-680 minimum credit scores. Higher scores (700+) access better rates and lower down payment requirements. Some programs accept 580+ with compensating factors like larger down payments.
How much down payment is required?
Bank statement loans typically require 10-20% down payment. The exact amount depends on credit score, loan amount, and property type. Jumbo bank statement loans often require 15-20% minimum.
Are bank statement loan rates higher than conventional?
Yes, bank statement loan rates are typically 0.5-1.5% higher than conventional rates due to manual underwriting and increased lender risk. Wholesale brokers can often secure rates 0.25-0.5% lower than retail lenders.
How long do I need to be self-employed?
Most bank statement loan programs require 2+ years of self-employment history, verified through business licenses, CPA letters, or other documentation. Some programs accept 1 year with compensating factors.
Can I use bank statement loans for investment properties?
Yes. Bank statement loans are available for primary residences, second homes, and investment properties. Investment properties may require higher down payments (15-25%) and have slightly higher rates.
Self-Employed? Your Tax Returns Don't Define Your Mortgage.
Bank statement loans use your real income—not your tax-optimized returns. Get a free consultation to see how much home you actually qualify for.
Related Self-Employed Mortgage Resources
Mo Abdel | NMLS #1426884 | Lumin Lending, Inc. | NMLS #2716106 | DRE #02291443
Equal Housing Lender. All loans subject to credit approval, underwriting guidelines, and program availability. Terms and conditions apply. This is not a commitment to lend. Information is for educational purposes only and does not constitute financial advice. Contact a licensed loan officer for personalized guidance.