Over 36% of the U.S. workforce does freelance work, and there are 70.4 million freelancers in the U.S. For that substantial portion of the U.S. population, securing a traditional mortgage that requires two years or more of employment history can be difficult. A 12-month bank statement mortgage offers an alternative for self-employed people or small business owners to qualify for a mortgage. Read on to find all the advantages of a bank statement mortgage and the steps to obtain one.
Quick Look: 6 Steps to Get a 12 Month Bank Statement Mortgage
- Find a lender
- Prepare your bank statements
- Gather additional documents
- Apply for a mortgage
- Review and sign mortgage agreement
- Make on-time payments
What is a 12-Month Bank Statement Mortgage?
A bank statement mortgage is designed for self-employed people, small-business owners, independent contractors and freelancers who don't receive traditional pay stubs. In other words, if you can't easily provide the lender with a W-2 form or other salary proof, this type of mortgage could be the perfect solution for your financial needs.
How Many Months of Bank Statements Do You Need for a Mortgage?
How many months of bank statements you need for a mortgage depends on the lender. Some lenders require fewer months, although 12 months is the average. Some lenders may require statements for the past 24 months. Check with a mortgage broker or local mortgage lenders for minimum required statements.
Advantages of a 12-Month Bank Statement Mortgage
A bank statement mortgage loan has major advantages for freelancers, the self-employed or people without traditional paychecks. Below are a few major reasons to consider a 12-month bank statement mortgage.
Easier Approval Process
Bank statement mortgages offer a simplified approval process for consultants, freelancers and small-business owners, including doctors, lawyers, real estate investors and real estate agents. With this type of loan, you won't need to provide other financial statements like W-2s or tax returns. Instead, your bank statement will serve as proof of income. Overall, this will make it easier to get approval for many people.
No W-2s Required
Qualifying for a traditional mortgage can be more challenging if you don't receive a W-2 for traditional employment. With a 12-month bank statement mortgage, you won't be required to provide W-2s, tax returns or other financial statements. Instead, your bank statement will serve as proof of financial stability.
Credit Score Not as Important
While lenders will still look at your credit score, it is not weighed as heavily as with other mortgage products. Credit score requirements vary by lender. Some will allow a credit score of 700-plus to qualify, while others may consider anyone with a credit score of 620 or higher.
Higher Debt-to-Income Ratios Allowed
You could carry a higher debt-to-income ratio as a small-business owner, freelancer or entrepreneur and still qualify for a bank statement mortgage. That's great news as the standard debt-to-income ratio may be hard to reach for some.
For this reason, you may be eligible for a higher total loan amount and can use bank statement loans for a primary residence, second home or investment purchase. Likewise, if you claim significant tax deductions, you may still qualify for a bank statement loan.
Common Misconceptions of a 12-Month Bank Statement Mortgage
Misconceptions about 12-month bank statement mortgages are always floating around. You may have heard that they are riskier or have higher interest rates, or that it's hard to find options. For the most part, these are simply misconceptions.
While it's true that not all lenders offer bank statement loans, there are many excellent options available. Interest rates may be higher, but again, this depends on the lender and your personal financial situation.
Finally, 12-month bank statement mortgages aren't riskier for borrowers. They are just as secure as standard mortgages. They can be riskier for lenders because bank statement mortgages are nonqualified mortgages. That means Fannie Mae and Freddie Mac don’t back them. But with bank statements and credit score verification, many lenders are willing to offer nonqualified mortgages.
6 Steps to Obtain a 12-Month Bank Statement Mortgage
The steps below cover the main points if you're ready to consider a bank statement mortgage to purchase your dream home or a second property.
1. Find a Lender Specializing in 12-Month Bank Statement Mortgages
A lender specializing in bank statement mortgages will be able to guide you through the process. The first step is researching and comparing lenders, looking for reviews and feedback, and contacting the lender to ask relevant questions. You can also have a mortgage broker help you find a specialized bank statement lender.
2. Prepare Your Bank Statements
The next step should be simple, as most banks will allow you to export your bank statements for the past 12 months with a click. You can also export all deposits as a separate report to show lenders. If you still receive paper statements, you may need to gather and organize bank statements and check for accuracy and consistency. No matter how you do it, you'll want to highlight regular deposits and income sources.
3. Provide Additional Supporting Documents
While you aren't required to provide supporting documents, they can improve your approval odds. Consider bringing tax returns, business statements, profit/loss statements and proof of assets, including savings.
4. Apply for the Mortgage
The next step is to complete the application and follow the instructions. The application process may differ for each lender, but most will require you to fill out a form with personal and financial details and supporting documents.
5. Review and Sign the Mortgage Agreement
Once approved for a 12-month bank statement mortgage, read carefully to understand the terms and conditions and clarify any questions or concerns before signing. Once you're confident of the terms, it's time to sign the agreement and receive the funds.
6. Maintain a Good Relationship with the Lender
The final step is the ongoing relationship with the lender to ensure you continue to build a good credit score and pay off the loan. For a good relationship with the lender, make on-time payments and communicate with it regarding changes or issues.
Who Can Benefit From a 12-Month Bank Statement Mortgage?
At least 36% of the U.S. population can benefit from a 12-month bank statement mortgage — specifically, small-business owners, self-employed workers and those with fluctuating or nontraditional income.
Self-Employed Individuals
A bank statement mortgage is a popular option for self-employed people who usually don't have traditional income documentation. The bank statements serve as proof of income and can be used to calculate debt-to-income ratios. Real estate investors with income from investment properties, doctors, lawyers, freelancers and gig workers may fall into this category.
Small-Business Owners
Depending on their business structure, small-business owners can benefit from a 12-month bank statement mortgage. If you're a small-business owner and you don't pay yourself a regular wage, a bank statement loan will improve your chances of loan approval. When you apply for a bank statement loan, it can help to also submit business profit-and-loss or business bank statements along with personal bank statements.
Those with a Fluctuating Income
If you're a gig worker or freelancer with fluctuating income, bank statement mortgage loans can be a way to demonstrate annual income without tax returns or pay stubs. Income fluctuations can be the result of gig work or freelance fluctuations but can also make sense for seasonal workers in agriculture or tourist destinations. If your income varies monthly, consider a bank statement program mortgage.
Tips for Getting Approved for a 12-Month Bank Statement Mortgage
If you're ready to move forward with a mortgage, consider having everything prepared to improve your chances of approval.
Improve Credit Score
A higher credit score demonstrates financial responsibility to lenders. The higher the credit score, the greater your chances of approval. Many lenders have a stated minimum credit score for mortgage approval from 620 to 700. You'll increase your loan approval chances with a credit score above that — aim for 740 or higher.
Save for a Higher Down Payment
You may get mortgage approval with a higher down payment, even with a lower credit score or higher debt-to-income ratio. Standard 12-month bank statement mortgage down payment requirements are 10%. With a 20% down payment, you'll significantly improve your chances of approval. If those numbers seem daunting, don't worry. Some lenders accept lower down payments.
Provide Additional Financial Information
Any additional financial information that demonstrates strength could be used to support your case. Consider assets like property, investment accounts, savings accounts and showing business income or profit/loss.
Find the Right Opportunity for You
If you're an independent contractor, freelancer or business owner, you're working hard to make you and your company successful, and you shouldn't be excluded from buying a home. A bank statement mortgage offers excellent opportunities for millions of Americans with difficulty qualifying for a traditional mortgage. With the steps above, you could be ready to buy a dream home this year. Get started with the best mortgage lenders for the self-employed or the best mortgage lenders for first-time home buyers.
Frequently Asked Questions
Is the interest rate for a 12-month bank statement mortgage higher than for traditional mortgages?
Interest rates for a 12-month bank statement mortgage could be 1% to 3% higher than a conventional loan, depending on the lender and the borrower’s financial profile. Often, a bank statement mortgage has comparable interest rates to current mortgage rates.
Who is eligible for a 12-month bank statement mortgage?
Freelancers, gig workers and other self-employed people or small business owners are eligible for a 12-month bank statement mortgage.
How does a 12-month bank statement mortgage differ from a traditional mortgage?
A 12-month bank statement mortgage differs from a traditional mortgage in income verification. A conventional mortgage uses tax returns, W-2s and pay stubs to verify monthly income, while a bank statement mortgage uses bank statements for income verification.