Mortgage can be difficult to figure out when your income doesn’t fall under conventional underwriting guidelines. The conventional mortgage can be confusing enough. But if you are self-employed, you own a business, or your income comes in non-traditional, semi-taxable ways — you’re looking at an entirely different process.
If your income is too complex for conventional underwriting, you will probably need to take the bank statement loan route. The bank statement loan-based mortgage is a go-to alternative to standardized documentation and traditional underwriting rules imposed upon conventional mortgages.
This article should make your mortgage journey easier and more risk-free by explaining the distinction between conventional and bank statement loan mortgages. Let’s get into it.
What is a Conventional Mortgage?
Conventional mortgage is the most common home loan structure, which is available to the widest range of borrowers (based on their qualification and eligibility) and is not backed (i.e., guaranteed or insured) by government loan programs, like FHA, VA, or USDA.
Conventional mortgages usually involve a highly standardized loan qualification process based on the direct analysis of the employment income of a borrower. This is why ерші structure fits most traditionally employed borrowers.
For one thing, to get evaluated by the conventional lender and qualify for a loan, you may need to submit the standard income documentation, like:
- Recent pay stubs
- W-2 forms
- Employment verification
- Tax returns or transcripts
- 1099 forms
- Investment or retirement-income documentation
- Business and personal tax returns (for certain self-employed cases)
Not every lender requires you to submit this exact same package of documents, but they will need direct, transparent sources of funds, employment, and cash flow. Current documentation standards for conforming mortgages include Fannie Mae and Freddie Mac frameworks (with non-conforming mortgages possible for certain borrowers).
Using Self-Employed Income in Conventional Underwriting
Important note — if you are self-employed, you can still easily qualify for conventional mortgages. It’s just that your income must meet all applicable requirements. The challenge lies in that the lender cannot simply accept your total business revenue as personal income.
They will still need to evaluate the qualifying articles of income under conventional underwriting rules.
To do that, the lender will also need to clarify the taxable income you are able to generate continuously, which doesn’t involve deductions like depreciation or legitimate operating expenses. This is why your taxable income can be dramatically lower on paper than it is in real life, and choosing an alternative underwriting route may be more optimal.
What is a Bank Statement Loan?
A bank statement loan can serve as a good alternative, offering a slightly more flexible submission process. Bank statement loan programs allow you to demonstrate income and prove your ability to repay to the lender with the help of bank account deposits.
You can provide 12 or 24 months of personal or business bank statements to enable the lender to analyze your cash flow.
Importantly, bank statement mortgages fall outside the standardized Qualified Mortgage framework. They’re considered non-QM loans — a special category of mortgages that can use alternative documentation.
*LTV – Loan-to-Value, a ratio of the mortgage size to the property’s appraised value.
Differences Between Bank Statement Loan vs Conventional Mortgage
| Point of difference | Bank statement loan | Conventional mortgage |
| Income documentation | 12-24 months of personal or business bank statements (normally). | Pay stubsW-2stax returnsother approved documentation |
| Main borrower profile | Self-employed borrowers with complex cash flow. | W-2 employees and borrowers whose income can be processed via conventional underwriting. |
| Tax returns | May not be required for income qualification (depends on the loan program). | Frequently required for certain self-employed income calculations. |
| Income calculation | Based on eligible deposits and the cash-flow methodology of the lender. | Based on qualifying income calculated under conventional guidelines. |
| Credit requirements | Can vary a lot by lender and program. | Standardized agency guidelines + lender requirements. |
| Down payment | Can be higher, although some loan programs have lower LTV options. | Some conventional loan programs allow down payments as low as 3% (for eligible borrowers). |
| Mortgage insurance | Depends on the loan program and LTV structure. | Many conventional loans with less than 20% down require private mortgage insurance. |
| Interest rate | Can be higher than conventional pricing. | Can be lower if you qualify for competitive conventional pricing. |
| Underwriting | More lender-specific and customized. | More standardized. |
| Income flexibility | High flexibility when you’re qualifying a self-employed cash flow. | More limited flexibility when you show a significantly reduced taxable income. |
| Loan availability | Depends on non-QM lenders and investor guidelines. | Readily available from conventional mortgage lenders. |
| Best fit | Well-documented cash flow that doesn’t qualify well conventionally. | Stable documented income that fits conventional requirements. |
The Differences in Income Calculation
The income model can differ essentially between the two mortgage types in discussion.
Calculating Conventional Mortgage Income
Both traditionally employed and self-employed borrowers should prepare for a standardized cash-flow analysis, which may require:
- tax returns
- Schedule C income
- K-1 income
- business expenses
- depreciations
- ownership percentage
- stability of earnings
Fannie Mae’s guidelines are used as a common standard here.
Calculating Bank Statement Loan Income
In a bank statement loan case, the lender examines deposits over a defined period, which is commonly twelve or twenty-four preceding months. More exactly, they need to analyze your overall deposit history and calculate an eligible monthly income figure.
However, not all deposits will be automatically counted as income to qualify for the loan. Some of the items that may be excluded out of the calculation or require additional explanation include:
- transfers between accounts
- borrowed funds
- refunds
- unusually large deposits
- other non-income transactions
Who Normally Needs Bank Statement Loans?
- Business owners with fluctuating monthly revenue and taxable income that’s belittled on paper.
- Freelancers & independent contractors with excellent annual cash flow, but no W-2 salary or a predictable paycheck.
- Commission-based earners with a sufficient long-term cash flow yet high mid-year income fluctuates.
- Real estate & other self-employed professionals who generate large deposits while their tax returns show low net income after business expenses.
How LBC Mortgage Can Help You
Need to choose the most optimal mortgage structure for your income type? Consult with specialists at LBC Mortgage for individual guidance, or use our platform right now to calculate your options and to automate your mortgage management.