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How is Income Determined for a Bank Statement Loan?

How is income determined for a bank statement loan? My husband and I are both self-employed and want to know if we can use a bank statement program to qualify for a mortgage.

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

As the name suggests, bank statement programs enable borrowers to qualify for a mortgage based on their bank statements instead of their tax returns and W-2s.  In short, deposits into your bank account serve as income when you apply for a mortgage.

As long as regular deposits appear on your bank statements, you should be able to qualify for the mortgage assuming the deposits enable you to afford the monthly payment, property tax, homeowners insurance and other housing-related expenses.  The more steady the deposits and income, the better from the lender's standpoint.

Many bank statement programs require statements for the most recent twelve months to verify your income although some programs may require 24 months. You may be eligible for better mortgage terms, such as a lower interest rate, if you provide 24 months of statements. In most cases applicants provide statements for their personal bank account but as we discuss below, you may also be required to provide statements for your business bank account, if you have one.

Review How a Bank Statement Mortgage Works

The income used for your mortgage application depends on how you deposit funds into your bank accounts and if you have separate personal and business accounts.  If you deposit money from your job or business directly into a personal bank account, lenders usually use 50% to 60% of the deposits to determine your gross income. For example, if you regularly make a monthly $10,000 deposit directly into your personal bank account, the lender uses $5,000 to $6,000 (50% to 60% of the deposit) in monthly gross income to determine the loan you qualify for.

If you transfer funds into your personal bank account from a separate business account, lenders usually use the full transfer amount to determine the mortgage you can afford. In this case, if you transfer $10,000 to your personal account from your business bank account every month, the lender uses the full $10,000 in gross income to calculate your bank statement loan amount.  In this scenario, you are usually required to provide three months of bank statements for your business account in additional to 12 to 24 months of statements for your personal account.

With both income calculation methodologies, lenders average your monthly gross income over the time period for the bank statements you provide. For example, if you transferred $36,000 from your business bank account into your personal account over the past year, then your average monthly gross income is $3,000 ($36,000 / 12 months = $3,000). As explained above, if you deposit the money you earn directly into your personal bank account instead of transferring it from a business account, the lender applies a 40% to 50% discount to your monthly income. 

It is important to highlight that while it can be helpful, the deposits into your account do not need to occur on a monthly basis. This point is especially important for applicants with seasonal or contract employment who experience fluctuations in their income and bank deposits over the course of the year. For example, if you transfer $12,000 into your personal bank account from your business account every three months, your average monthly gross income is $4,000 ($12,000 x 4 deposits per year = $48,000 / 12 months = $4,000).

The lender uses this income figure as well as your monthly debt payments for credit cards and car, personal and student loans to determine the mortgage you qualify for.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford based on your monthly income and debt expense

The only case when lenders do not use your average monthly gross income over the specified time period is if your recent deposits declined significantly and the drop was not caused by job seasonality.  In this scenario the lender usually uses the more recent, lower deposit amount for your gross income when you apply for the mortgage, which means you qualify for a lower loan amount. 

The downsides of a bank statement loan are that lenders typically charge a higher mortgage rate plus the qualification guidelines can be more challenging in other areas. For example, bank statement loans usually require a down payment of at least 10% and a higher minimum credit score. If your credit profile is borderline this is definitely a point to consider when you speak with lenders.

We advise you to contact multiple lenders as qualification guidelines and mortgage terms vary, especially for bank statement loans. When you speak with lenders you can determine if a bank statement or standard self-employed mortgage program is the better financing option for you. 

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You can also use our FREEandCLEAR Lender Directory to search for lenders by state, lender type and loan program. For example, you can search for top-rated lenders in your state that offer bank statement loans or mortgages for self-employed borrowers.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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