Bank-statement loans, explained

Why tax returns fail the self-employed

A good accountant minimizes your taxable income. A conventional underwriter reads that minimized figure as your income. Both are doing their jobs, and the result is a business owner with a healthy operation who cannot qualify for a mortgage on paper.

Bank-statement programs were built for that gap. Instead of the net figure on a tax return, they look at the deposits flowing through your accounts over the last year or two and treat those as the evidence of what the business produces.

How the income is calculated

The lender reviews 12 or 24 months of statements and totals the eligible deposits. For business accounts, an expense factor is applied to approximate the cost of running the business; many programs use a standard percentage, and some accept a letter from your CPA stating your actual expense ratio. The result is divided by the number of months to give a monthly qualifying income.

Personal statements showing business deposits can sometimes be used without an expense factor, which can produce a higher figure. Which set to use is one of the first decisions Troy makes when he reviews your file.

What underwriters look for

Consistency matters more than any single month. Underwriters look at the pattern of deposits, flag unusually large or irregular ones, and exclude transfers between your own accounts. They will also look for overdrafts and returned items, and for a business that is at least a couple of years established.

• Deposits that look like revenue, arriving in a regular pattern
• Large one-off deposits, which need an explanation and may be excluded
• Transfers between your own accounts, which are excluded
• Non-sufficient-funds activity, which hurts
• Evidence the business has been operating long enough to be stable

What to gather before you call

Having these on hand lets Troy run the calculation on the first pass and tell you where the qualifying income lands before you apply.

• 12 or 24 months of statements for the account where business revenue lands
• Your business license, or another document showing how long you have operated
• The name and contact details of your CPA, if a letter may help
• A note on any large deposits so they can be explained up front

What it costs

Bank-statement loans are priced above agency loans for the same credit profile, because the investor is taking on documentation risk. For many self-employed borrowers that premium is the price of a loan that otherwise would not exist. Troy shows the cost next to any agency option you might qualify for, and tells you plainly which one serves you better.