Bank Statement Loans

What is a Bank Statement Loan?

A bank statement loan is an alternative residential mortgage program that qualifies borrowers based on monthly income from their business or personal bank statements. Lenders base top line revenue on the total monthly deposits into the bank account.

Who are Bank Statement Loans Intended For?

As I mentioned above, bank statement loans are a great alternative for real estate investors and self-employed borrowers who have to use maximum write-offs or significant deductions on their taxes, which show very little – or even negative – annual personal income. This prevents them from qualifying for a conventional mortgage.

Below are a few borrower scenarios in which FCTD originated financing for investors and self-employed borrowers:

Self-Employed Individuals with Maximum Write-Offs

FCTD has worked with several high-earning, self-employed borrowers whose tax strategy is to incorporate losses and write off all expenses, reducing their Adjusted Gross Income (AGI) to a very low number in relation to their top line revenue. We see this with doctors, lawyers, real estate investors, manufacturing company owners, service providers, and other professionals. A bank statement loan is a great option for this type of borrower, who may have difficulty qualifying for conventional and jumbo loans.

Real Estate Investors with 40-50 Rentals

FCTD has a few real estate investor clients with 40-50 residential rental properties, most of which have mortgages. These properties generate significant write-offs, between the mortgage interest, property taxes, capital investments, and depreciation. Each year, they may file with a negative AGI and pay little to no personal income taxes. This scenario makes it impossible to qualify for a conventional or jumbo mortgage on their primary or second home. Thus, we use the business bank statements, backing out the debt service costs on their rental portfolio, to reach their qualifying personal income.

House Flippers with Large Annual Income Swings

Since 2013, FCTD has worked with numerous real estate investors who flip houses for a living. Most of these investors also hold a real estate license or general contractor (GC) license, saving money on costs from their professional licenses. Depending on where they are in their renovation and selling cycle, they could have significant income swings from year to year. One recent situation was a house flipper selling four projects within a 2-3-month window, significantly boosting inflow to their bank account – and making them attractive to lenders. However, they only sold one project in the 12 months prior, not enough to qualify for a $1 million mortgage on the new primary residence they were buying.

Business Owners Who Acquire New Businesses

FCTD had a client buy out the business of a retiring competitor. Our client paid half the purchase price upfront, with the balance due over the next 36 months. The one-time payment reduced their personal income taxes significantly, disqualifying them for jumbo financing. We used a 12-month business bank statement program to get them into a $2 million mortgage.

Selling at the Peak, Downsizing, Qualifying with Asset Depletion Program

During the 2020-2022 pandemic housing boom, FCTD did several loans for real estate investor clients who sold their primary residences for way more than expected, netting well over $1 million from the sale. The offers were too good to pass up. All the investors bought smaller, less expensive homes, qualifying for financing using an asset depletion loan.

Divorce Settlements Using Investment Accounts to Calculate Income

In one example, a divorce settlement split assets down the middle, with each person getting one house and half the investment account. FCTD used an asset depletion loan program (below) to qualify one person for the mortgage and remove the other spouse from the loan and title.

What Are The Different Bank Statement Programs?

We generally use three different types of bank statement loans to help our real estate investor and business owner clients finance their primary residences.

12-24 Month Bank Statements

12-24 month business and/or personal bank statement loans are the most common bank statement programs. These give lenders a good understanding of the top line revenue coming into the business over a one to two-year period.

3-Month Bank Statements + YTD P&L

There are variations of using 1-3 month(s) bank statements plus a year-to-date (YTD) profit & loss (P&L) signed off by the borrower’s CPA. Various lenders have a different spin on the program. In the case of the house flipper client mentioned above (selling four properties in one 2-3-month window), the 3-month bank statement program was ideal because we only had to show three months (when income was high), rather than provide 12 months of bank statements (when the average was much lower.)

Asset Depletion

Asset depletion loans can use a single bank statement and/or an investment account statement to qualify for financing. FCTD has used both bank statements and investment accounts for borrowers with significant liquid assets but not much personal taxable income.

How Is Bank Statement Income Calculated?

Most mortgages require borrowers to qualify through their W2s, 1099s, pay stubs, and tax returns to determine income. Bank statement loans, however, use the gross bank deposits minus a reasonable expense ratio to calculate a borrower’s income.

Calculating Deposits

Lenders will total all deposits each month to calculate gross income. Transfers between different accounts owned by the same borrower usually aren’t credited as a deposit.

Documenting Deposits

An underwriter will require a borrower to document the source of deposits with invoices, leases, closing statements from the sale of real estate (house-flippers provide the final settlement statements of the homes sold), royalties, etc.

Expense Factors

The lender will assign an expense factor based on the type of business the borrower owns or how they generate revenue. A professional house-flipper will have a 50-60% expense factor against their deposits because they spend a lot on labor and materials to renovate properties. On the other hand, a psychologist working from home and seeing clients over Zoom will only have a 10-15% expense factor.

Asset Depletion Calculations

Asset depletion loans are calculated two different ways:

1. 125% of the new loan balance
2. Investment account balance divided by 360 months

The charts below show how this works:

Qualifying for a Bank Statement Loan

To qualify for a bank statement loan, you need to be self-employed or in your current line of work for at least two years. You need to steer clear of overdrafts or transferring money between accounts to cover expenses. Lenders are looking for consistent deposits into your bank account.

Below is the list of items you’ll need to obtain a bank statement loan:

• Application
• Photo ID/SSN Card
• Entity: Articles, Bylaws/Operating Agreement, & EIN
• Professional License
  (real estate, general contractor, attorney, medical professional, etc.)
• Bank Statements (3, 12, or 24 months)
• Investment Statement (for asset depletion loan)
• Supporting Documents to Verify Deposits
  (final settlement statements if a house flipper, invoices, real estate commissions, etc.)
• Insurance Dec Page

Once we receive these items, we can start the process. From start to finish, bank statement loans take about 3-4 weeks to close. The most common delay is appraisal turn time. In busy markets like Seattle and Puget Sound, it can be wise to pay a little extra for a rush order rather than waiting 4-6 weeks to complete the appraisal. 

Summary

Bank statement loans are alternative residential mortgage programs that use a borrower's business or personal bank statements to determine monthly income for financing. These loans are intended for self-employed borrowers and real estate investors whose significant tax write-offs are a roadblock to qualifying for conventional or jumbo mortgages. FCTD has many years of experience brokering bank statement loans, and works with a strong network of lenders to help these individuals find the financing that’s right for them. 

Connect with us today to learn if bank statement loans with FCTD are right for you.