If you're self-employed and researching mortgage options, it doesn't take long before you run into the term "bank statement loan."
That can create a new question: if bank statement loans exist, should you be looking at one instead of a conventional mortgage?
The answer depends on your situation.
For some borrowers, traditional income documentation works perfectly well. For others, it may make sense to explore alternatives depending on how income is earned and documented.
In this article, I'll compare conventional mortgages and bank statement loans, explain some of the key differences, and help you understand when each approach may be worth exploring.
Key Takeaways:
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Conventional mortgages and bank statement loans are often compared, but the biggest difference is usually how income is documented and evaluated.
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Conventional mortgages typically rely on traditional income documentation such as tax returns and other financial records.
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Bank statement loans may use bank statements as part of the income documentation process.
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Many self-employed borrowers qualify for conventional mortgages and may not need to explore alternative documentation options.
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Bank statement loans are often explored by self-employed borrowers whose tax returns may not fully reflect their income or cash flow.
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Neither option is automatically better than the other. The right fit depends on the borrower's situation, available documentation, and the requirements of the loan program being considered.
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What Is a Conventional Mortgage?
A conventional mortgage is one of the most common types of home loans available to borrowers.
When reviewing a conventional mortgage application, lenders will typically look at factors such as income, credit history, assets, and overall financial profile. Income is often documented through tax returns, pay stubs, W-2s, and other financial records, depending on the borrower's situation.
For many self-employed borrowers, a conventional mortgage may still be a good fit. If tax returns accurately reflect income and the borrower meets the program requirements, there may be no need to explore alternative documentation options.
That's why it's important not to assume that being self-employed automatically rules out a conventional mortgage.
What Is a Bank Statement Loan?
As the name suggests, bank statement loans use bank statements as part of the income documentation process.
They're often explored by self-employed borrowers whose income may not be reflected through traditional tax return-based methods.
For example, a business owner may have strong revenue and healthy cash flow but show a lower taxable income after business expenses and deductions are taken into account.
Depending on the loan program and the borrower's circumstances, lenders may be able to use bank statements as part of the process for evaluating and documenting income.
Like conventional mortgages, bank statement loans still require lenders to review a borrower's overall financial picture. The difference is often how income is documented and evaluated during the application process.
What is the difference?
While conventional mortgages and bank statement loans are often compared, the biggest differences usually come down to how income is documented and evaluated during the mortgage process.
The table below highlights some of the key distinctions between the two approaches.
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Conventional Mortgage |
Bank Statement Loan |
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Often relies on traditional income documentation such as tax returns and other financial records. |
May use bank statements as part of the income documentation process. |
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Commonly used by borrowers with straightforward income documentation. |
Often explored by borrowers whose income may be documented differently. |
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Income is generally evaluated using traditional financial records. |
Bank statements may provide additional context around income and cash flow. |
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May work well when tax returns accurately reflect income. |
May be worth exploring when tax returns don't fully reflect a borrower's financial situation. |
Which Option is Best for You?
If your tax returns accurately reflect your income, a conventional mortgage may be all you need.
On the other hand, if you're self-employed and your tax returns don't tell the full story, it may be worth looking at a bank statement loan.
I've seen both scenarios.
Some borrowers assume they need a bank statement loan simply because they're self-employed. Others assume they won't qualify for a conventional mortgage and never even explore it.
The reality is that every situation is different.
That's why I always recommend looking at the numbers before making assumptions. A quick review of your income and documentation can often provide a much clearer picture of what options may be available.
Not Sure Which Approach Makes Sense?
A lot of self-employed borrowers start their home search thinking they need one specific type of loan. Sometimes they're right, and sometimes not. The only way to know is to look at the full picture.
If you're self-employed and thinking about buying a home in Maryland, DC, or Virginia, get in touch. I can review your situation and help you understand what options may be worth exploring.
Frequently Asked Questions About Conventional Mortgages Vs Bank Statement Loans
Can self-employed borrowers qualify for conventional mortgages?
Yes. Many self-employed borrowers qualify for conventional mortgages. If tax returns accurately reflect income and other program requirements are met, a conventional mortgage may be a good fit.
Why would someone explore a bank statement loan instead of a conventional mortgage?
Some borrowers explore bank statement loans because their income may not be fully reflected through traditional tax return-based methods. Depending on the situation, bank statements may be used as part of the income documentation process.
Do bank statement loans use bank statements instead of tax returns?
Requirements vary by lender and loan program. Depending on the situation, lenders may review bank statements as part of the income documentation process and may also require additional financial documentation.
Are bank statement loans only for self-employed borrowers?
They are most commonly associated with self-employed borrowers, but available options and eligibility requirements vary depending on the lender and loan program.
Which is easier to qualify for: a conventional mortgage or a bank statement loan?
There isn't a one-size-fits-all answer. Qualification depends on factors such as income, assets, credit history, documentation, and the requirements of the loan program being considered.
Can I qualify for a conventional mortgage if I own a business?
Possibly. Many business owners qualify for conventional mortgages. Whether a conventional mortgage is a good fit depends on how income is documented and the borrower's overall financial situation.
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