Bank Statement Loans for Real Estate Investors: Guide

Buy Properties Without Relying on Your Tax Returns

Buying an investment property can be challenging when your income doesn't fit conventional mortgage requirements. You may own a business, work independently, or earn money from several sources. Even if you have enough income to afford another property, your tax returns might not show the full picture.

A bank statement loan, which we'll discuss in this article, offers another way to qualify. Instead of relying on tax returns to calculate income, lenders review deposits in your bank accounts.

For real estate investors, this can be useful when purchasing a rental property or expanding an existing real estate portfolio. However, bank statement loans have their own requirements, so it's important to understand how they work before applying.

What Is a Bank Statement Loan?

A bank statement loan is a type of mortgage that allows borrowers to verify income using personal or business bank statements instead of traditional income documents.

These loans are generally considered non-qualified mortgages, or non-QM loans. They offer alternative income verification for borrowers who may find it challenging to qualify for conventional financing.

Lenders typically review 12 to 24 months of bank statements. They will examine your deposits, identify eligible income, and calculate an average monthly amount. This can be particularly helpful for self-employed investors whose business expenses and tax deductions reduce their reported taxable income.

Wondering whether this type of loan could work for you? Explore LBC Mortgage's bank statement mortgage loans to learn more about your financing options.

Why Real Estate Investors Pick Bank Statement Loans

Real estate investors don't always receive a regular salary. Some run their own businesses, and others work as consultants, contractors, or real estate agents.

For example, you might own a construction company and use part of your earnings to purchase rental properties. Your business may generate substantial revenue, but deductions for equipment, materials, and other expenses can reduce the income shown on your tax returns. And yes, this can make conventional mortgage qualification more difficult.

A bank statement loan allows lenders to examine your deposits rather than relying on traditional tax-return calculations. However, you don't automatically qualify just because your accounts show large deposits. Lenders still need to determine how much of that money represents income you can use to repay a mortgage.

How Lenders Calculate Your Income

When reviewing bank statements, lenders generally calculate your average monthly eligible deposits over a specified period.

For example, suppose your business account gets $240,000 in eligible deposits over 12 months. That works out to an average of $20,000 per month. However, $20,000 in monthly deposits doesn't necessarily mean $20,000 in qualifying income.

If you submit business bank statements, the lender may consider your operating expenses when determining your qualifying income. The percentage depends on the loan program and your business. Lenders may also exclude transfers between your own accounts, loan proceeds, and other deposits that don't represent actual earnings. That's why two investors with similar bank balances may qualify for different mortgage amounts.

What Are the Requirements for a Bank Statement Loan?

Requirements vary by lender, but several factors usually affect your eligibility.

Bank Statements and Your Business History

Most programs require 12 or 24 months of personal or business bank statements. Lenders may also request proof of self-employment, such as a business license or a letter from a CPA (Certified Public Accountant). They generally want to see that your income is consistent enough to support future mortgage payments.

Credit Score and Down Payment

Your credit history matters because lenders need to assess how you've managed previous financial obligations.

You'll also need a down payment. The amount depends on the program, your credit profile, and the property you're financing. Keep in mind that investment properties may require a larger down payment than homes purchased as primary residences.

Debts and Cash Reserves

Lenders may consider your existing mortgages, car loans, credit card payments, and other debts. They may also require cash reserves. These are funds you have available after closing to help cover mortgage payments and unexpected expenses.

For investors, reserves are particularly important because rental properties can experience vacancies and costly repairs.

Bank Statement Loans vs. DSCR Loans

Some bank statement loan programs allow borrowers to finance rental properties. However, not every program permits investment properties, so you should confirm eligibility before applying.

Another option for real estate investors is a debt service coverage ratio (DSCR) loan. While both loan types can help investors finance rental properties, they work differently.

A bank statement loan focuses on your qualifying income based on bank deposits. A DSCR loan focuses primarily on whether the property's rental income is enough to cover its debt payments.

For example, if you operate a profitable business and want to purchase your first rental property, a bank statement loan may be worth considering. If you already own several rental properties and want to qualify based on the income of your next investment, a DSCR loan may be more appropriate.

But neither loan is automatically better. The right choice depends on your income, the property's rental potential, and the available terms.

What Should Investors Consider Before Applying?

Before choosing a bank statement loan, compare it with other financing options. Bank statement loans can come with higher interest rates or different down payment requirements than conventional mortgages. You should also review closing costs and any prepayment penalties.

Next, calculate the full cost of owning the property. Besides the mortgage payment, consider property taxes, insurance, maintenance, repairs, and potential rental vacancies.

It's also worth reviewing your bank statements before applying. Make sure you can explain unusual deposits and identify transfers that shouldn't count as income.

How LBC Mortgage Can Help You Understand Options

If you're planning to purchase an investment property, the LBC Mortgage team can help you explore financing options based on your income and investment goals. Our experts will review your bank statements, explain documentation requirements, and help you compare bank statement loans with other mortgage programs.

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Author:

Alex Shekhtman CEO & Founder, LBC Mortgage

Yes. Some bank statement loan programs allow borrowers to finance investment properties, including homes they plan to rent out. But, in this case, the property must meet the lender’s requirements.

A bank statement loan might be advantageous if you’re self-employed and earn income from a business alongside your real estate investments. Assume you run a landscaping business and want to buy a home for rental purposes. Your business generates a steady flow of income; however, you claim tax deductions for supplies, tools, and other expenses.

This means your tax returns may show less income than your business actually generates.

A bank statement loan enables the lender to evaluate your income using a different method. Instead of basing an income evaluation chiefly on tax returns, a lender can review deposits made into your bank accounts.

However, not every deposit represents income. A lender may disregard borrowed funds, transfers between your own accounts, and other transactions that are not actual earnings. Business expenses will also influence the final calculation of qualifying income.

Moreover, borrowers have to meet other requirements related to their credit score, down payment, debts, and financial situation. It is equally necessary to determine whether the preferred loan program allows financing for the given type of investment property. If the primary income source is rent, then a DSCR loan may be a suitable option.

However, the right decision will depend on how borrowers earn their income and how they plan to finance the property.

Most bank statement loan programs require either 12 or 24 months of personal or business bank statements. Depending on the lender and the loan program, the requirements may differ. The bank statements help lenders estimate your income, as they want to know how much money you earn on average over a specific period instead of relying only on the income reported on your tax returns.

For example, if you run a seasonal business, you may have larger deposits during certain months and smaller ones during others.

Reviewing statements over a longer period may allow lenders to see those fluctuations in income. Nevertheless, if the lender requires you to submit 24 months’ worth of statements, it doesn’t mean that you’re automatically eligible for a mortgage.

Lenders still have to determine which deposits can count toward qualifying income. If you use business bank statements, they may apply an expense factor to account for your business operating costs.

You may also need to provide additional business documents to support your application.

Prior to making an application, it is important to check your statements to see if your income deposits are clearly identifiable. If you tend to transfer money between accounts frequently, be ready to explain those transactions. By preparing your documentation in advance, you can gain a better understanding of your financing options and minimize potential delays in your application.

Neither option is always better. A bank statement loan may be a good option if you have strong personal or business income, whereas a DSCR loan may be a smart option for someone who primarily relies on rental income to qualify. The main difference is how lenders evaluate income.

When it comes to bank statement loans, lenders want to see what funds have been deposited into your personal or business bank accounts. They use eligible deposits to calculate your qualifying income and assess whether you can afford the mortgage.

Let’s assume that you operate a profitable business and wish to acquire a rental property. Chances are, your tax returns show relatively low taxable income because of the deductions you claim for your business expenses. In such a case, bank statement financing may serve as an alternative option.

Unlike a bank statement loan, which focuses on income from personal or business deposits, a DSCR loan focuses on the property’s rental income.

This can be helpful for people who already own several rental properties or wish to obtain another investment without relying heavily on personal income documentation. However, the property’s rental income must satisfy the program’s requirements.

The two financing options may differ in terms of interest rates, down payment requirements, fees, and reserve requirements. When selecting the appropriate financing option, it is important to determine whether your personal or business income or the property’s expected rental income provides a stronger basis for qualification.

Moreover, it is important to analyze the overall costs of borrowing and ensure that the monthly payments do not exceed your investment budget.

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