Bank Statement Loans for Self-Employed Borrowers in California
You run a profitable business. Your accountant does a good job keeping your taxable income low. Then you apply for a mortgage and the bank says your income is too low to qualify.
That is the most common problem self-employed borrowers bring to Ted Erickson, a Novato mortgage broker with 24 years in the business. A bank statement loan is often the fix.
What Is a Bank Statement Loan?
A bank statement loan is a mortgage that uses the deposits in your bank accounts to figure your income instead of your tax returns, W-2s or pay stubs.
It is a type of non-QM (non-qualified mortgage) loan. That does not mean “no rules.” Lenders still have to make a reasonable, good-faith determination that you can repay under the federal Ability-to-Repay rule. Bank statements are simply the documentation they use to do it.
How Lenders Figure Your Income
Here is the general process. Each lender has its own version.
- You provide statements. Lenders commonly ask for 12 or 24 months of personal or business bank statements.
- The lender totals eligible deposits. Transfers between your own accounts, refunds and one-time deposits that are not business income are usually backed out.
- An expense factor is applied to business accounts. Your business has costs, so lenders count only part of business deposits as income. Some lenders use a standard factor, some use a higher factor for high-expense industries, and some let a CPA or tax preparer document your actual expense ratio.
- The result is averaged into a monthly income figure, which then goes into a normal debt-to-income calculation.
Personal vs Business Statements
- Personal statements: Usually counted more fully, since the money has already been paid to you from the business.
- Business statements: Run through the expense factor. Lenders typically require you to own a meaningful share of the business.
Ted looks at both before deciding which way gives you the stronger file.
Who a Bank Statement Loan Fits
- Business owners and sole proprietors
- Independent contractors and 1099 earners
- Real estate agents, mortgage professionals and others on commission
- Gig workers and freelancers
- Owners whose returns show large write-offs, depreciation or a recent dip
Most lenders want to see an established history of self-employment, commonly one to two years, depending on the program.
Bank Statement Loan vs Conventional Loan
| Factor | Bank statement loan | Conventional loan |
|---|---|---|
| Income documentation | 12 or 24 months of bank statements | Tax returns, W-2s or pay stubs |
| Who it is built for | Self-employed and 1099 earners | Mostly W-2 employees, or self-employed with strong returns |
| How write-offs affect you | Write-offs usually do not reduce qualifying income | Write-offs reduce qualifying income |
| Pricing | Generally higher | Generally lower |
| Cash required | Generally more | Generally less |
| Property types | Primary, second home and investment, depending on lender | Primary, second home and investment |
| Government backing | None (non-QM) | Sold to Fannie Mae or Freddie Mac |
The Trade-Offs, Straight Up
A bank statement loan solves a real problem, but it is not free.
- Higher cost. Expect pricing above a conventional loan.
- More cash required. Lenders generally want a larger down payment and reserves than conventional loans.
- Credit matters. Good credit still opens the most options.
- Clean statements help. Overdrafts, NSF fees and large unexplained deposits create questions.
If your returns already show enough income, a conventional loan is usually the cheaper path. Ted checks that first.
How to Get Ready
Gather the Right Documents
- 12 to 24 months of complete bank statements, every page
- Proof the business exists, such as a business license, CPA letter or state registration
- A profit and loss statement, if the lender asks for one
- Asset statements for your down payment and reserves
- Photo ID
Keep Your Accounts Clean
- Avoid mixing personal and business spending where you can.
- Be ready to explain large deposits that are not regular business income.
- Do not move money around between accounts in the months before you apply without a paper trail.
Talk to a Broker Before You Shop Homes
Every lender calculates bank statement income a little differently. One lender’s expense factor might leave you short while another’s gets you approved. Ted runs your statements through several lenders’ methods to find the one that fits your business best.
Then he shops the loan. Non-QM lenders price the same bank statement loan very differently, so once Ted knows which lenders will approve your income, he compares their pricing and terms side by side to find the strongest offer for you.
California Notes
Self-employment is common in Marin and Sonoma County, from contractors and winery suppliers to consultants and real estate professionals. Higher home prices in this part of California make it even more important to count every dollar of real income you earn. A bank statement loan can also be paired with a high-balance loan amount, depending on the lender.
Bank statements are one way to qualify; Ted’s self-employed mortgage page compares the others. If your savings tell the story better, read about asset depletion loans. If you invest in rentals, a DSCR loan may fit, and if a bank already turned you down, see Ted’s mortgage denied second look page.
Bank Statement Loan Questions
Talk to Ted
Self-employed and tired of hearing no? Ted will look at your statements and tell you which path makes sense.
Call or text Ted at (415) 717-0477, or get your options online.
Sources
Ted Erickson (Theodore Emery Erickson), NMLS #223442. Barrett Financial Group, L.L.C., NMLS #181106, 3207 Grey Hawk Court, Suite 110, Carlsbad, CA 92010. CA 60DBO-46052 and 41DBO-148702, licensed by the Dept. of Financial Protection and Innovation under the California Residential Mortgage Lending Act. Equal Housing Opportunity. Not all borrowers will qualify. This article is general information, not a commitment to lend.
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