Bank Statement Loans For Self Employed & Small Business Owners

Bank statements are a great way to secure funding for your small business  in 2024 if you’re self employed!

Remember the wild ride that was the COVID-19 pandemic? Masks, lockdowns, and enough conspiracy theories to make your head spin. But amidst the chaos, something fascinating happened to the way we work. Offices emptied as employers shifted to remote work (and let's be honest, anyone with kids knows THAT was a whole new level of chaos). But a massive, unexpected change came along with it: the pandemic actually sparked a huge surge in new businesses!

Don't believe me? Check out the data from the brainiacs at the National Bureau of Economic Research (NBER). They've been tracking this stuff since 2004, and the number of new business applications since mid-2020 is off the charts.

The problem? While the way we work has changed, traditional loans and mortgages are still stuck in the past. Being your own boss is awesome – you set your schedule, follow your passion. But getting a loan? Not so awesome.

If you're a freelancer, contractor, gig worker, or small business owner, you know the struggle. W2s, tax returns, paystubs... it's like they were designed for someone else's life.

But what if there was a way to leverage your actual cash flow, not just your tax paperwork?

That's where bank statement loans come in.

What Are Bank Statement Loans?

Bank statement loans are a type of mortgage designed for borrowers who may not have traditional income documentation, such as W-2s or pay stubs.

Bank statement loan lenders use personal or bank statements (your cash-flow) to verify income, not tax returns, W2s or pay stubs.

Sounds pretty straightforward, right? Well, there are some criteria you may need to meet.

While bank statement loans offer a lot of flexibility, the lenders still have lending requirements.

Requirements for Bank Statement Loans For Small Business Owners and Freelancers

While bank statement loans are very flexible, they still have some lending requirements.

They can vary lender by lender, but generally you'll need:

• Business Documents - license, registration etc.
• 12-24 months of personal or business bank statements
• Minimum Credit Score of 660 (if applicable)
• Enough liquid assets to cover several monthly installments
• A CPA Letter

When applying for a bank statement loan, you'll typically need to provide the following documents:

• Personal identification (e.g., driver's license, passport)
• Business license and registration
• Personal and/or business bank statements (12-24 months)
• Profit and loss statements
• Business tax returns (1-2 years)
• List of assets and liabilities
• Proof of business ownership
• CPA letter verifying your self-employment status

How Bank Statement Loans Differ from Traditional Loans

Conventional mortgages often have far stricter income verification requirements. They rely heavily on your tax returns and W-2s, they might have lower interest rates compared to bank statement loans.

Bank Statement Mortgages offer more flexibility when it comes to income verification and loan amounts. They rely on your personal or business bank statement over a period of time (usually 12 to 24 months) for income verification.

This allows them to gauge your recent bank statements for qualifying income and your ability to make mortgage payments down the road.

Some lenders can have highly specific eligibility criteria, including a minimum credit scores and consistent deposits in your account.

The interest rates vary by lender, but may be slightly higher because the lender's taking on more risk.

How The Lenders Verify Your Income

Income verification is the first step when it comes to getting a mortgage for buying or refinancing a property.

Lenders typically look at your:

• Savings
• Debts
• Investment Balances
• Retirement Income

Moreover, the tax system is designed to benefit the self-employed in many ways. Business owners often maximize deductions to minimize taxable income, which is a smart and legitimate strategy.

However, this reduced taxable income can make qualifying for a mortgage challenging.

Lenders traditionally look at the adjusted gross income (AGI) on tax returns to determine loan eligibility.

A lower AGI might suggest to lenders that the borrower doesn’t have the necessary income to afford the mortgage, even if this isn't the case.

What Are The Benefits Of Bank Statement Loans For Small Business Owners?

Instead of a single year's AGI, bank statements provide a more comprehensive overview of a borrower’s financial health, revealing regular income, spending habits, and financial responsibility.

Some of the benefits of bank statement loans for small business owners and freelancers are:

• Flexibility: Lenders offering bank statement mortgages understand the unique financial situations of the self-employed and typically have more flexible requirements regarding credit scores, debt-to-income ratios, and business longevity.
• Higher Approval Chances: By providing a broader picture of financial stability, bank statement loans increase the likelihood of mortgage approval.
• Reflect True Income: They allow borrowers to demonstrate their actual income, including money reinvested into the business, which might not be apparent on tax returns.
• Expanded Eligibility: If your tax return requirements or income documentation don't align with traditional lending standards, bank statement loans provide a viable path.
• Faster Approval: With fewer tax documents involved, the mortgage process can be faster and less cumbersome.
• Diverse Loan Options: You can explore various bank statement loan types, including fixed-rate, adjustable-rate, and even jumbo loans for higher loan limits.

Another important thing is income fluctuation, which is quite common for freelancers and small-business owners.

For instance, a self employed borrower can experience seasonal fluctuations in their income. Some months they earn $15,000, while others they bring in only $3,000.

For those with regular fixed income, let's say a freelancer earns $25,000 a month. After business expenses, their documented taxable income may be around $15,000 a month.

This can reduce their borrowing power when it comes to traditional mortgages.

Bank Statement Loans however, can assess the overall financial health based on average deposits, allowing them to leverage their actual cash flow rather than just taxable income.

Which means a larger loan amount and more options in the market.

How Can Self-Employed Business Owners Get A Bank Statement Loan?

First, you'll have to prove that you're self-employed for some time. Different lenders have different requirements on how long the borrower should be in business to qualify for a loan.

This can include invoices, websites, and other supporting documents.

When you submit your bank statements to the lender. They'll assess your net income qualification based on average deposits, monthly revenue and expenses.

After qualifying for the loan you'll have to make a down payment which can be anywhere from 10-20%.

Securing a bank statement business loan can be a streamlined process when you know what to expect. Here's a simplified breakdown of the typical steps involved:

• Gather Your Documents: Start by collecting essential documents, including your identification, business incorporation papers (if applicable), profit and loss statements, business tax returns, and—most importantly—your business bank statements from the past 3 to 6 months.
• Share Your Business Story: Along with the documents, you'll need to provide the lender with a clear overview of your business. This includes your business structure, industry, revenue model, and the specific purpose for which you need the loan.
• Underwriting and Approval: Once you've submitted your application and supporting documents, the lender will assess your creditworthiness and business financials. This underwriting process can take anywhere from a couple of days to a few weeks, depending on the lender and complexity of your application.
• Loan Offer and Review: If your application is approved, the lender will present you with a loan offer detailing the loan amount, interest rate, repayment terms, and any other relevant conditions. Take your time to thoroughly review this offer before accepting.
• Closing and Disbursement: After you've accepted the terms, you'll sign the loan agreement to finalize the deal. Once the paperwork is complete, the lender will disburse the funds directly to your business bank account. You'll then start making regular payments according to the agreed-upon schedule.

How bank statement loans can affect credit scores:

Applying for a bank statement loan may result in a hard inquiry on your credit report, which can temporarily lower your credit score.

As with any loan, making timely payments on your bank statement loan can help improve your credit score over time.

Conversely, late or missed payments can negatively impact your credit score and may make it harder to obtain future loans or credit.

Successfully paying off a bank statement loan can demonstrate your ability to manage debt and may boost your credit score in the long run.

It's essential to maintain a good credit standing by consistently making on-time payments and managing your debt responsibly.

How To Find Bank Statement Loan Lenders

There are plenty of online lenders who specialize in these types of loans.

Another great resource is a mortgage broker. They can help you compare different lenders and find the best rates and terms for your situation. They'll also guide you through the application process, making it as smooth as possible.

Remember, interest rates and terms for bank statement loans can vary depending on the lender and your financial profile. So, it's always a good idea to shop around and compare offers before making a decision.

While the process might seem a bit different from a traditional mortgage, don't let that deter you. Bank statement mortgage loans are a great option for self-employed individuals who want to achieve their homeownership dreams.
When choosing a lender for a bank statement loan, consider:

• Interest rates and loan terms
• Lender’s reputation and customer reviews
• Fees and closing costs
• Customer service quality

Look for lenders who specialize in working with self-employed borrowers and have experience in handling bank statement loans.

Interest Rates and Terms
Interest rates for bank statement loans can be very competitive, though they might be slightly higher than those for traditional loans.

The rates can vary significantly depending on the lender, your creditworthiness, and the loan amount.

Loan terms can range from 15 to 30 years, similar to traditional mortgages. Rates are influenced by:

• Credit score
• Loan-to-value ratio (LTV)
• Amount of documentation provided
• Typical Loan Terms

Tips for a Successful Application:

• Maintain Clean Bank Statements: Ensure your personal bank account or business bank statements are well-organized and reflect consistent deposits.
• Prepare Additional Documentation: While tax returns might not be the primary focus, lenders might still request some additional financial documentation, such as profit and loss statements or business licenses.
• Work with a Tax Professional: If your business has a lower expense factor, consulting a certified public accountant (CPA) can help optimize your financial records for loan approval.
• Consider a Larger Down Payment: A higher down payment can improve your chances of approval and potentially lead to better loan terms.

Who should get a bank statement mortgage loan?

While this product is primarily geared towards self-employed individuals, it can also benefit others with non-traditional income streams, such as:

• Freelancers with varying income month-to-month.
• Business owners who have significant business-related write-offs.
• Real estate investors with depreciation that impacts their AGI.
• Anyone who has tax return anomalies that don't reflect their actual earning potential.

 Are you thinking of applying for a mortgage or buying a house soon?  If so, you’ll want to definitely consider a bank statement mortgage.

And there’s no better place to start than Truss Financial Group.  Truss takes a common sense approach to lending, and they are experts in bank statement loans. They can help you navigate the process and find the right option for you.

Alternatives to Bank Statement Loans

If a bank statement loan isn't the perfect fit, consider these alternative loans for your small business:

• DSCR Loans: Debt Service Coverage Ratio loans are based on your property's income potential rather than your personal income. These loans are suitable for real estate investors who have a strong rental income but may not qualify for traditional mortgages due to their tax returns.
• Asset Qualifier Loans: These loans consider your assets, such as stocks, bonds, or real estate, to determine eligibility. Asset qualifier loans are a good option for you if you have substantial assets but limited reported income on their tax returns.
• FHA Loans: Federal Housing Administration loans have more flexible guidelines for self-employed borrowers but still require tax returns. FHA loans are suitable for borrowers with lower credit scores or limited down payment funds.
• Personal Loans: Stated Income Personal loans can be used for business purposes and may have less stringent income requirements. They're best suited for short-term financing needs or smaller loan amounts.

Frequently Asked Questions

Q: How long do I need to be self-employed to qualify?
A: Typically, lenders require at least 2 years of self-employment history to qualify for a bank statement loan.

Q:Can I use personal bank statements?
Yes, many lenders accept personal bank statements, but some may prefer business bank statements for a clearer picture of business income.

Q: How quickly can I get approved?
A: The approval process varies by lender but generally takes a few weeks, depending on how quickly you can provide the required documentation.

Q:How Do Bank Statement Loans Affect Credit?
A:Just like other loans - timely repayments can improve your score, while missed payments can damage it.

Q:How long do I need to be self-employed to qualify for a bank statement loan?

A: Lenders typically require at least two years of self-employment history to qualify for a bank statement loan.

Q: Are interest rates higher for bank statement loans compared to traditional mortgages?

A: Yes, bank statement loans often come with higher interest rates due to the perceived higher risk associated with non-traditional income verification.

Q: Can I qualify for a bank statement loan with a poor credit score?

A: It's possible, but a poor credit score may affect the terms of the loan, including the interest rate. Some lenders specialize in bank statement loans for borrowers with less-than-perfect credit.