12 Months Personal or Business Bank Statements

A 12 month bank statement loan allows self-employed borrowers to qualify using deposits received through their business rather than relying exclusively on income reported on tax returns. Qualification may be based on either personal or business bank statements, depending on how the borrower operates the business and receives income.

The program is designed for active U.S. based businesses and provides several methods for determining qualifying income. Personal deposits may be used in certain situations, while business deposits are generally adjusted for operating expenses using a fixed expense factor or an eligible third party expense ratio.

Bank Statement Loan Program Overview

Program features include:

• 12 months personal or business bank statements
• 6 months personal bank statements – 75% Max LTV
• 3 months personal bank statements – 70% Max LTV
• Minimum 640 credit score
• Loan amounts from $150,000 to $3,500,000
• Up to 90% LTV for eligible primary residence purchases
• Up to 85% LTV for eligible primary residence cash out refinance
• Primary residence, second home, and investment property financing
• Purchase, rate and term refinance, and cash out refinance
• 20%, 30%, and 50% fixed business expense factors (exceptions to 15% for 100% service-based businesses)
• Third party business expense ratios with a 10% minimum expense factor
• Maximum DTI generally 50% (exceptions to 55%)
• Up to 55% DTI under more restrictive primary residence guidelines
• 30-year and 40-year fixed rate options
• 30-year and 40-year Interest-Only options
• 5/6 and 7/6 ARM options

The maximum loan amount, LTV, credit score, and other requirements depend on the occupancy, transaction type, income calculation method, and overall borrower profile.

Self-Employed Borrower Requirements

Bank statement qualification is intended for borrowers who own and actively operate a business. Passive investment activity, asset speculation, day trading, venture capital activity, and similar sources are not treated as operating business income under the bank statement program.

The business generally must have been in existence for at least two years. A borrower with less than two years of self-employment may be considered when at least two years of prior employment in the same or a related line of work can be documented. Less than one year of self-employment generally cannot be considered effective qualifying income.

Business Ownership

Minimum ownership depends on the method used to qualify:

• Business bank statements generally require at least 25% ownership.
• Certain personal bank statement structures may permit 20% ownership.
• Personal accounts containing commingled business and personal activity generally require at least 25% ownership.

Ownership may be documented through an operating agreement, eligible tax professional documentation, or comparable business records.

A change in business structure does not necessarily restart the self-employment history. A transition from a sole proprietorship to an LLC or S Corporation, for example, may be treated as a continuation of the same business when continuity can be documented.

Business Narrative

The borrower must provide enough information for the underwriter to understand how the business operates and whether the income and expense assumptions are reasonable.

The business narrative may address:

• Type of business and services provided
• Business location
• Number of employees or contractors
• Materials or inventory
• Vehicles, machinery, or equipment
• Office, retail, or commercial space
• Customer or client base

Third party information may also be used to confirm the existence and operating profile of the business.

Personal Bank Statement Qualification

Personal bank statements may be used when self-employment income is deposited into the borrower’s personal account.

The treatment of those deposits depends primarily on whether the borrower also maintains a separate business bank account.

Personal Statements With a Separate Business Account

When business income is transferred from a separate business account into the borrower’s personal account, 100% of eligible business deposits received in the personal account may be considered.

The borrower generally provides the most recent two months of business bank statements to establish that the deposits originated from the borrower owned business.

Eligible deposits may include:

• Transfers from the business account
• Payroll received from the business
• Business distributions

The minimum ownership requirement under this method may be as low as 20%.

Personal Statements With No Separate Business Account

A self-employed borrower who operates directly through a personal account may also qualify.

Only deposits attributable to the borrower’s business activity are included. Because business and personal funds are commingled, the appropriate business expense factor is applied when required.

A qualifying low overhead service business may be eligible for a 20% expense factor. Businesses with greater operating costs may require a 50% expense factor.

Repeated expenses appearing in the account that are not reflected on the borrower’s credit report may also require explanation or consideration as liabilities.

Business Bank Statement Qualification

Business bank statement qualification starts with the gross eligible deposits received by the business during the 12 month review period.

Those deposits are then reduced by an expense factor intended to account for the cost of operating the business.

The expense factor should make sense for the actual business. A sole owner consultant working from home would ordinarily have a different expense structure than a contractor with employees, vehicles, equipment, and materials.

50% Expense Factor

A 50% expense factor is available for otherwise eligible businesses.

With this calculation, 50% of eligible deposits is treated as business expenses and the remaining 50% becomes qualifying income.

Example

Average eligible business deposits: $50,000 per month

50% expense factor: $25,000

Qualifying monthly income: $25,000

The borrower must generally own at least 25% of the business. Negative or decreasing ending balances must be addressed, and seasonal or cyclical income patterns may be considered.

30% Expense Factor

A 30% expense factor may be available for qualifying small service businesses.

Examples may include:

• Consulting
• Accounting
• Legal services
• Therapy
• Financial planning
• Insurance

The business generally may have no more than five employees.

A small office is permitted when office rent does not exceed 15% of gross business income. Retail, wholesale, landscaping, contracting, and similar non-office businesses are not eligible for this expense factor.

Example

Average eligible deposits: $50,000

70% remaining after expenses: $35,000

Qualifying monthly income: $35,000

20% Expense Factor

The 20% expense factor is designed for very low overhead service businesses.

The borrower generally must be the sole owner and operator, with:

• No partners
• No employees
• No significant cost of goods
• No heavy machinery or equipment

Example

Average eligible deposits: $50,000

80% remaining after expenses: $40,000

Qualifying monthly income: $40,000

Third Party Expense Ratio

Instead of using a fixed expense factor, certain businesses may qualify using an expense percentage documented by an independent CPA, Enrolled Agent, Tax Attorney, or eligible CTEC tax professional.

The expense ratio must be reasonable for the business and cannot generally be lower than 10%.

The professional must attest that the expense percentage accurately represents the applicable cash expenses of the business and must verify the borrower’s ownership percentage.

The documentation generally must:

• Be prepared by an independent eligible tax professional
• Be on professional letterhead
• Be wet signed
• Originate from the tax professional’s office
• Not contain qualifying language

Borrowers who prepare their own business tax returns are not eligible for this method.

Certain businesses cannot use a third party expense ratio. These include real estate investors, construction companies, restaurants and food service businesses, lenders, retailers, merchandise businesses, and grocery stores. These businesses generally require at least a 50% fixed expense factor.

The third party expense ratio also carries additional LTV limits:

Transaction – Maximum LTV

• Purchase – 80%
• Rate and Term Refinance – 80%
• Cash Out Refinance – 75%

Calculating Bank Statement Income

The starting point is the total amount of eligible business income deposits, not the total amount of money moving through the account.

Transfers between accounts, loans, refunds, asset sales, and other deposits that do not represent business revenue may need to be excluded.

Eligible deposits are totaled over the 12 month review period and divided by 12.

For example:

Eligible deposits over 12 months: $720,000

Average monthly deposits:
$720,000 ÷ 12 = $60,000

If the borrower qualifies for a 30% expense factor:

$60,000 × 70% = $42,000 qualifying monthly income

For a personal bank statement structure where 100% of eligible deposits can be used, the calculation may be different because a separate expense factor may not be required.

Multiple Bank Accounts

Multiple accounts may be included when necessary.

However, a borrower using more than five separate business accounts must generally qualify using personal bank statements rather than combining more than five business accounts.

Transfers between accounts require careful review so the same income is not counted more than once.

Large Deposits

A deposit is considered large when it exceeds 50% of the average monthly deposits being used for qualification.

For example:

12 month eligible deposits: $900,000

Monthly average:

$900,000 ÷ 12 = $75,000

Large deposit threshold:

$75,000 × 50% = $37,500

An individual deposit exceeding $37,500 would therefore require an explanation or evidence that it represents legitimate business income.

NSFs and Overdrafts

Up to 10 NSF occurrences during the most recent 12 months may be permitted.

An NSF occurrence can include a transaction that:

• Is declined or reversed
• Results in a negative account balance
• Is identified by the bank as an NSF
• Generates certain overdraft charge

An overdraft is generally not treated as an NSF when funds from another account cover the transaction and the account does not have a negative end of day balance.

Income Trends

The deposit history should demonstrate ongoing business activity.

The most recent three months should generally not account for the majority of the income received during the entire year.

Declining income may still be considered, but additional analysis or an explanation may be required. The lower income level may be used unless the income can be shown to have stabilized over the most recent period.

Bank Statement Loans for Real Estate Investors

A real estate investor with a maximum of four rental properties may qualify under the bank statement program.

Rental income is analyzed separately rather than simply treating rent receipts as ordinary operating business deposits.

The borrower generally provides:

• Current annual leases
• Evidence that rents are consistent with market rents
• Proof of receipt of the most recent month’s rent

Qualifying income is calculated using:

85% of lease income minus documented PITIA

For example:

Monthly rent: $5,000

85% of rent:

$5,000 × 85% = $4,250

Documented PITIA: $3,000

Qualifying rental income: $1,250 per month

If a lease is held in an entity, the rental income may be considered when the borrower is the sole owner of the entity.

Supplemental Income

Bank statement income may be combined with other eligible sources of income.

Depending on the borrower’s circumstances, supplemental income may include:

• Rental income
• W-2 income
• Trust income
• Retirement income
• Alimony or child support
• Note receivable income
• Royalty income
• Other eligible recurring income

Joint borrowers may use different documentation methods. For example, one borrower may qualify using bank statements while another qualifies using traditional wage income.

When different documentation types are combined, the applicable LTV, FICO, pricing, and underwriting restrictions may be based on the more restrictive documentation type depending on the amount of supplemental income being used.

Loan Amounts, Credit Scores, and LTV

The program provides financing from $125,000 to $3,500,000.

Actual maximum financing is determined by occupancy, transaction type, credit score, and any additional bank statement documentation restrictions.

Primary Residence Purchase and Rate and Term Refinance

Maximum Loan – Amount Minimum FICO – Maximum LTV

• $1,000,000 – 700 – 90% (Purchase)
• $1,500,000 – 720 – 90% (Purchase)
• $2,000,000 – 680 – 85%
• $2,000,000 – 660 – 80%
• $2,500,000 – 680 – 80%
• $3,000,000 – 700 – 80%
• $3,500,000 – 700 – 75%

The fixed expense bank statement method permits up to 90% LTV on eligible primary residence purchase transactions.

Primary Residence Cash Out Refinance

Maximum Loan Amount – Minimum FICO – Maximum LTV

• $1,500,000 – 700 – 80%
• $1,500,000 – 660 – 75%
• $2,000,000 – 720 – 80%
• $2,000,000 – 700 – 75%
• $2,000,000 – 660 – 70%
• $2,500,000 – 720 – 75%
• $2,500,000 – 700 – 70%
• $3,000,000 – 720 – 70%

Second Home

Second home purchase and rate and term financing is available up to 85% LTV, depending on loan amount and FICO.

Maximum Loan Amount – Minimum FICO – Maximum LTV

• $1,000,000 – 660 – 85%
• $1,000,000 – 640 – 80%
• $1,500,000 – 700 – 85%
• $1,500,000 – 640 – 75%
• $2,000,000 – 660 – 80%
• $2,000,000 – 640 – 65%
• $2,500,000 – 680 – 80%
• $2,500,000 – 660 – 75%
• $3,000,000 – 680 – 70%

Cash out financing is available up to 75% LTV at eligible loan amounts.

A fixed expense bank statement calculation is generally limited to 85% LTV for a second home purchase or rate and term refinance and 80% for cash out.

Investment Property

Maximum Loan Amount – Minimum FICO – Maximum LTV

• $1,500,000 – 660 – 80%
• $2,000,000 – 680 – 80%
• $2,000,000 – 660 – 75%
• $2,500,000 – 700 – 80%
• $3,000,000 – 720 – 70%

Investment property cash out options include:

Maximum Loan Amount – Minimum FICO – Maximum LTV

• $1,500,000 – 680 – 75%
• $2,000,000 – 660 – 70%
• $2,500,000 – 720 – 70%

The applicable bank statement calculation method can further restrict the maximum LTV shown in the general matrix.

Additional Loan Requirements

The minimum qualifying credit score is generally 660.

For bank statement loans, the qualifying credit score is generally based on the primary income earner. Special treatment may apply when ownership and income are divided equally between borrowers.

Debt-to-Income Ratio

Maximum DTI is generally 50%.

For transactions above 85% LTV, maximum DTI is generally 45%.

DTI above 50% and up to 55% may be considered when all applicable requirements are satisfied, including:

• Primary residence only
• Maximum 80% LTV
• Minimum 720 FICO
• Maximum $1,500,000 loan amount
• Nine months reserves
• No 40-year term
• No Interest-Only
• No third party business expense ratio
• Additional documentation restriction

Reserve Requirements

Bank statement loans generally require six months of reserves.

Reserves are based on the actual principal, interest, taxes, insurance, and applicable homeowners association payment.

Cash out proceeds may be used to satisfy reserve requirements when permitted.

Housing and Credit History

Borrowers generally must be current on their mortgage, property taxes, HOA payments, or rent at the time of application.

A 0 × 30 × 12 housing history is the standard requirement, although a single 30 day late payment during the previous 12 months may be considered with applicable adjustments.

Housing events such as foreclosure, short sale, deed in lieu, default modification, or a 120 day mortgage delinquency generally require four years seasoning.

Chapter 7, Chapter 11, and Chapter 13 bankruptcy generally require four years seasoning from discharge or dismissal. Multiple bankruptcy filings are not eligible under these guidelines.

Available Loan Terms and Property Types

Bank statement borrowers have access to several loan structures, including:

• 30-year fixed
• 40-year fixed
• 30-year Interest-Only
• 40-year Interest-Only
• 5/6 ARM
• 7/6 ARM

Interest-Only generally requires a minimum 680 FICO

Eligible 30-year Interest-Only purchase transactions may reach 85% LTV, while the 40-year Interest-Only option is generally limited to 80% LTV.

Eligible residential property types include:

• Single family residences
• PUDs
• Condominiums
• 2 to 4 unit properties
• Eligible non-warrantable condominiums
• Certain rural properties
• Certain properties with agricultural zoning
• Properties with eligible accessory dwelling units

Warrantable condominiums are generally limited to 85% LTV and non-warrantable condominiums to 80% LTV.

Condotels, manufactured homes, mixed use properties, barndominiums, co-ops, log homes, working farms, and several other specialized property types are not eligible under these guidelines.

When a Bank Statement Loan May Make Sense

A bank statement loan can be useful when a self-employed borrower generates sufficient business cash flow but taxable income is reduced by legitimate business expenses and deductions.

The analysis focuses on the income actually generated by the business, the consistency of deposits, the cost of operating the business, and the amount of income reasonably available to the borrower.

For that reason, two businesses receiving the same amount in monthly deposits can produce very different qualifying income. A sole owner professional with minimal overhead may qualify using a 20% expense factor, while a company with employees, equipment, inventory, and other substantial expenses may require a 50% expense factor.

Reviewing the complete 12 month bank statement history before underwriting can help determine the appropriate calculation method and identify large deposits, transfers, NSFs, declining deposits, or other items that may need to be documented.

Available in the Following States

Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia, and Washington.

Last Updated on 3 days ago by Broker Mortgages