Bank Statement Loans: Income Qualification Guide for Self-Employed Borrowers

Bank statement loans qualify self-employed borrowers using personal or business bank deposits rather than tax returns, allowing entrepreneurs to use actual cash flow for mortgage qualification. For brokers serving business owners, freelancers, and gig economy workers, bank statement programs unlock financing that traditional documentation methods can’t support.

This comprehensive guide covers bank statement qualification methodology, expense ratio calculations, program variations, and strategies for maximizing qualifying income for your self-employed clients.

Why Self-Employed Borrowers Need Bank Statement Loans

Traditional mortgage qualification relies on tax returns—a system designed for W-2 employees with straightforward income documentation. Self-employed borrowers face unique challenges:

The Tax Return Problem

Self-employed individuals and business owners legally minimize taxable income through legitimate deductions. Depreciation, home office expenses, vehicle costs, equipment purchases, and business losses reduce adjusted gross income, often dramatically understating actual cash available for mortgage payments.

A business owner grossing $400,000 annually might show $80,000 in net income after deductions. Traditional underwriting would qualify them based on $80,000—a fraction of their real earning capacity.

Who Benefits from Bank Statement Loans

Bank statement programs serve diverse self-employed populations:

• Business Owners: Sole proprietors, LLC members, S-Corp and C-Corp shareholders
• Freelancers and Consultants: Independent contractors across industries
• Gig Economy Workers: Rideshare drivers, delivery workers, platform-based earners
• Commission-Based Professionals: Real estate agents, insurance agents, sales professionals
• Seasonal Business Operators: Construction contractors, landscapers, tourism businesses
• Cash-Heavy Businesses: Restaurants, retail, service businesses with significant cash transactions

How Bank Statement Qualification Works

Bank statement loans calculate income from deposit history rather than tax returns. The methodology analyzes deposits over 12 or 24 months to establish average monthly income.

The Basic Calculation

Qualifying Income = (Total Eligible Deposits ÷ Statement Period) × (1 – Expense Ratio)

Where:

• Total Eligible Deposits: Sum of deposits determined to be business income
• Statement Period: 12 or 24 months depending on program
• Expense Ratio: Percentage deducted to account for business expenses

Personal vs. Business Bank Statements

Programs typically accept either personal or business bank statements, with different treatment:

Personal Bank Statements:

• Show deposits from all sources
• Require identification of business income deposits
• May include salary, transfers, and personal deposits that must be excluded
• Often use lower expense ratios (owner has already paid business expenses)

Business Bank Statements:

• Show business revenue directly
• More straightforward income identification
• Higher expense ratios applied (business expenses haven’t been paid)
• May require explanation of owner’s draws or distributions

Some programs allow combining personal and business statements when the borrower’s income flows through both accounts.

Understanding Expense Ratios

The expense ratio is the critical variable in bank statement qualification. It represents the assumed percentage of gross deposits consumed by business expenses before becoming available income.

Standard Expense Ratio Application

Most bank statement programs apply default expense ratios based on business type:

Business Category	Typical Expense Ratio	Net Income Factor
Service Business (Low Overhead)	30-40%	60-70%
Professional Services	40-50%	50-60%
Retail/Inventory Business	50-60%	40-50%
Restaurant/Food Service	60-70%	30-40%
Construction/Contracting	50-60%	40-50%

 

Example:

A consultant with $25,000 in average monthly deposits and a 40% expense ratio would have qualifying income of $25,000 × 0.60 = $15,000/month.

Reducing Expense Ratios with CPA Letters

Many programs allow borrowers to document actual expenses through CPA verification, potentially reducing the applied expense ratio:

CPA Letter Requirements:

• Prepared by licensed CPA (not enrolled agent or tax preparer)
• States actual business expense percentage
• Based on review of business financials
• Signed and dated within program timeframes

Example Impact:

A retail business owner with 60% default expense ratio but actual expenses of 45% (verified by CPA) could increase qualifying income by 25%:

• Default: $30,000 × 0.40 = $12,000
• With CPA letter: $30,000 × 0.55 = $16,500

Not all programs accept CPA letters, and some cap the expense ratio reduction. Verify specific program guidelines before structuring deals around CPA documentation.

12-Month vs. 24-Month Programs

Bank statement programs vary in the statement period required:

24-Month Bank Statement Programs

Advantages:

• Smooths income volatility over longer period
• Better for seasonal businesses
• May demonstrate income growth trend
• Often allows higher LTV

Disadvantages:

• Requires two full years of statements
• Recent income improvements diluted by older data
• More documentation to gather

Best For:

• Established businesses with stable income
• Seasonal operations needing full-year cycles
• Borrowers with consistent deposit patterns

12-Month Bank Statement Programs

Advantages:

• Captures recent income more accurately
• Less documentation required
• Better for growing businesses
• Recent income improvements fully reflected

Disadvantages:

• May show more income volatility
• Seasonal businesses may appear inconsistent
• Some programs require higher credit scores

Best For:

• Growing businesses with increasing revenue
• Borrowers with recent business changes
• Clients with strong recent performance

Hybrid Approaches

Some borrowers benefit from analyzing both periods:

• Use 24-month if income is stable or declining (averages out better)
• Use 12-month if income is growing (captures improvement)
• Consider seasonal patterns when selecting period

Deposit Analysis and Income Calculation

Accurate deposit analysis is critical for bank statement qualification. Understanding what counts—and what doesn’t—determines qualifying income.

Eligible Deposits

Typically counted as income:

• Business revenue deposits
• Client/customer payments
• Accounts receivable collections
• Credit card settlement deposits (net of fees)
• Recurring income from contracts
• Royalty or licensing payments

Excluded Deposits

Not counted as qualifying income:

• Transfers between accounts (same owner)
• Loan proceeds
• Cash deposits exceeding certain thresholds (sourcing required)
• Tax refunds
• Insurance claims
• One-time settlements or legal awards
• Gifts or inheritance
• Sale of assets

Large Deposit Documentation

Deposits exceeding program thresholds (often 25-50% of average monthly deposits) may require sourcing documentation. Be prepared to explain:

• Source of large deposits
• Whether they represent regular business income
• Documentation supporting the deposit source

Bank Statement Loan Program Parameters

Understanding typical program parameters helps brokers set accurate client expectations:

Credit Score Requirements

Bank statement programs typically require:

• Minimum:620-660 depending on program
• Optimal Pricing:700+ for best rates
• Higher LTV Access:720+ for maximum leverage

Credit requirements may increase for:

• Lower expense ratios (more income risk)
• Higher loan amounts
• Cash-out refinances

Loan-to-Value Limits

Typical LTV ranges:

• Primary Residence:Up to 90% (with strong credit/income)
• Second Home:Up to 80-85%
• Investment Property:Up to 80%

Cash-out refinances often cap 5-10% below purchase LTV limits.

Debt-to-Income Ratios

Unlike DSCR loans, bank statement programs calculate DTI:

• Typical Maximum:43-50% depending on program and compensating factors
• Back-End Ratio:All monthly debt payments ÷ qualifying income
• Housing Ratio:PITIA ÷ qualifying income (often limited to 35-43%)

Reserve Requirements

Bank statement loans typically require:

• Primary Residence:2-6 months PITIA
• Second Home:6-12 months PITIA
• Investment Property:6-12 months PITIA

Reserves may be satisfied through:

• Bank accounts (checking/savings)
• Investment accounts (stocks, bonds, mutual funds)
• Retirement accounts (at reduced value, typically 60-70%)

Structuring Bank Statement Deals

Strategic deal structuring maximizes qualification potential:

Selecting the Right Statement Period

Choose 12-Month When:

• Recent 12 months shows higher average income
• Business experienced growth in past year
• Older data would dilute current performance

Choose 24-Month When:

• Income is volatile month-to-month
• Seasonal business needs full cycle representation
• Recent period had temporary dip

Optimizing Expense Ratios

Strategies to Reduce Applied Ratio:

1. Obtain CPA letter documenting actual expenses
2. Select program with lower default ratios for business type
3. Use personal statements if business expenses already paid
4. Demonstrate low-overhead business model

Timing Bank Statement Collection

When possible, advise clients to:

• Time application after strong deposit months
• Complete large invoices/projects before statement period ends
• Avoid statement periods with unusual one-time expenses
• Ensure statements show complete months

Common Bank Statement Challenges and Solutions

Challenge 1: Mixed Personal and Business Deposits

Situation: Self-employed borrower uses single account for all transactions, complicating income identification.

Solution:

• Work with underwriter to identify and categorize deposits
• Provide client payment records matching deposits
• Consider future account separation for subsequent transactions
• Some programs accept explanation letters for regular patterns

Challenge 2: Cash-Heavy Business

Situation: Business receives significant cash payments that are deposited irregularly or in varying amounts.

Solution:

• Document cash deposit patterns over time
• Provide business records (POS reports, appointment logs) supporting revenue
• Consider programs with higher tolerance for cash deposits
• Large cash deposits may require additional sourcing

Challenge 3: Business with Recent Startup

Situation: Self-employed borrower has less than 24 months of business operation.

Solution:

• Use 12-month bank statement program
• Some programs allow combination with prior W-2 income
• Consider alternative documentation programs (1099, asset depletion)
• Wait until 12-month operating history established if possible

Challenge 4: Income Trending Down

Situation: Recent months show declining deposits compared to earlier periods.

Solution:

• Use 24-month program to smooth the decline
• Obtain explanation letter for temporary factors
• If decline is permanent, qualification may need adjustment
• Consider timing application after income stabilizes

Bank Statement vs. Other Non-QM Programs

Help clients choose the right program:

Bank Statement vs. DSCR

Choose Bank Statement When:

• Purchasing or refinancing primary residence
• Investment property with low or no rental income
• Strong personal income but complex tax returns
• DTI-based qualification is viable

Choose DSCR When:

• Investment property with positive rental income
• Prefer no personal income disclosure
• Multiple investment properties
• Want faster documentation process

Bank Statement vs. 1099 Income

Choose Bank Statement When:

• Income comes from multiple sources
• 1099s don’t capture full income picture
• Business income exceeds 1099 documentation
• Need to include cash or non-1099 income

Choose 1099 When:

• Income primarily from 1099 sources
• 1099 amounts support qualification
• Simpler documentation preferred
• Two years of consistent 1099 history available

Bank Statement vs. Full Documentation

Choose Bank Statement When:

• Tax returns show significantly less than actual income
• Self-employment deductions are substantial
• Tax return complexity creates underwriting challenges
• Speed and simplicity valued over rate optimization

Choose Full Doc When:

• Tax returns support qualification
• Seeking lowest available rates
• Simple self-employment with clean returns
• Comfortable with full income disclosure

Submitting Bank Statement Loans to AHL

American Heritage Lending offers bank statement programs through our All Star and Rising Star product lines.

Program Highlights

All Star Bank Statement:

• 12 or 24 months bank statements
• Personal or business statements accepted
• CPA letter option for expense ratio reduction
• Primary, second home, and investment properties
• Up to 90% LTV (with strong profile)

Submission Checklist

• [ ] Complete loan application
• [ ] 12 or 24 consecutive months of bank statements (all pages)
• [ ] Business license or documentation of self-employment
• [ ] CPA letter (if using for expense ratio reduction)
• [ ] Asset statements for reserves
• [ ] Two years tax returns (some programs for reasonability check only)

Documentation Tips

Bank Statement Quality:

• All pages required (even blank pages)
• Statements must be consecutive months
• No gaps in statement periods
• Account holder name must match borrower
• Statements should be from single account or clearly linked accounts

Frequently Asked Questions

How far back do bank statements need to go?

Programs require either 12 or 24 consecutive months of statements ending within 30-60 days of application. Some programs have flexibility on the ending date.

Can I combine personal and business statements?

Some programs allow combining statements when income flows through both accounts. This must be documented clearly to avoid double-counting.

What if I just started my business?

Most bank statement programs require 12-24 months of self-employment. Newer businesses may need to wait or explore alternative programs like 1099-based qualification.

Do I still need to provide tax returns?

Many bank statement programs do not use tax returns for income calculation but may require them for a “reasonability check” to ensure bank statement income isn’t wildly inconsistent with tax filings.

What expense ratio will apply to my client’s business?

Default expense ratios vary by business type and program. CPA letters can document actual expenses to potentially reduce the applied ratio. Contact your AE for specific program expense ratio schedules.

Partner with AHL for Bank Statement Loans

American Heritage Lending’s TPO division provides wholesale and correspondent partners with competitive bank statement programs designed for self-employed borrowers.

Questions about bank statement qualification? Contact your Account Executive or call (855) 340-9892.

Not yet a partner? Apply at ahlendtpo.com and access our complete non-QM product suite including bank statement, DSCR, and alternative documentation programs.